Kmart Files for Bankruptcy

Discounter Kmart filed for Chapter 11 today in the largest-ever bankruptcy for a U.S. retailer. The bankruptcy has been widely expected.

The company, which secured $2 billion in debtor-in-possession financing, said it would continue to operate its 2,100 stores while it restructures its business.

Shares in Kmart, which have lost around 85 percent of their value since the beginning of the year, dropped by another 50 percent on the news today.

The move comes as no surprise to industry watchers, who have been speculating in recent weeks that the company's financial woes would prompt it to file for bankruptcy. On Monday, the Troy, Mich.-based retailer's sole supplier of groceries said it delayed or stopped shipments to the beleaguered retailer.

Dallas-based food supplier Fleming said Kmart owes it $78 million in merchandise receivables. Retail analysts tell ABCNEWS many other vendors have been withholding shipments to Kmart, demanding that the company pay cash for the products.

Kmart Chief Executive Charles Conaway said in a statement that he regrets any adverse effect the bankruptcy will have on the retailer's associates, vendors and business partners, but after considering alternatives, bankruptcy protection was the only way to truly resolve the company's problems. Kmart is aiming to emerge from Chapter 11 in 2003.

"I am confident that, with our tremendous resources and dedicated supplier and associate communities, Kmart will emerge from this process as a stronger, more dynamic, more profitable enterprise with a well-defined position in the discount retail sector," said Conaway.

Times of Trouble

While the bankruptcy filing will give the retailer a chance to help itself out of its precarious financial situation, some suspect the move could lead to hundreds of store closings across the country.

Kmart said in a statement that all of its stores are open for business, but that it would continue to pursue "opportunities to reduce annual expenses by an additional $350 million through reengineering the organization, staff reductions, office consolidations and other actions."

The discount retailer also named Ronald B. Hutchinson to a new position of chief restructuring officer, in which he will work to rebuild and reposition the company. Hutchinson was most recently the chief financial officer of the Advantica Restaurant Group, a Spartanburg, S.C., group that owns restaurant chains like Denny's.

Bad news for Kmart has been mounting in recent weeks after the company announced that weak December sales would cause it to miss analysts' earnings estimates for the fiscal year ending Jan. 30. Credit rating agencies Moody's Investors Service and Standard & Poor's have also struck by downgrading their credit ratings on the discount retailer.

Amid the turmoil last week, the company ousted Chief Operating Officer Mark Schwartz and named James B. Adamson, one of its board of directors, to be chairman, replacing Conaway, who will remain as chief executive.

Investors nervous about the company's fundamentals have sent Kmart's shares plummeting since the beginning of the year, prompting Standard & Poor's to take Kmart out of its S&P 500 index last week.

Heated Competition

Analysts say a bankruptcy reorganization could help the retailer sort through some of its financial problems.

"The potential upside is that in either filing for protection or at least in approaching suppliers and requesting aid from them, it might give Kmart the opportunity to come out of this," said Howard Nemiroff, professor of finance at Long Island University in New York.

"The consumer has no idea for the most part that a company may or may not be in bankruptcy," added Kurt Barnard, president of Barnard's Retail Trend Report in Montclair, N.J. "So bankruptcy wouldn't make any difference whatsoever so long as the store can show that it has the merchandise the customers came in to buy."

But the possibility of store closings did not sit well with some avid Kmart fans today.

"As a mom in financially tough times this has been a store that has offered all sorts of things — home products, cleaning supplies, toys at a discount and it's conveniently located, so it will be a big loss," said Kathleen Anesco, who was shopping at a Kmart in Paramus, N.J.

Staying in the forefront of consumers' minds will be paramount for Kmart, even if it gains the confidence of some suppliers, say analysts. While the recession has made the environment for retailers tough in general, Kmart has had a tougher time because of heated competition from more nimble discount retailers like Wal-Mart and Target.

"There's a huge gap" between Kmart and its competitors, said Standard & Poor's analyst Mary Lou Burde. "I'm sure it can be narrowed, but there will still be a gap."

Price Wars

Chief among Kmart's problems, say industry watchers, are its ability to compete on price, which stems from an inefficient supply-chain infrastructure. While discounter Wal-Mart is renowned for its "just-in-time" inventory system that allows the company to restock products as necessary and keep its costs low, Kmart lacks this efficiency.

"They decided to take Wal-Mart on by way of trying to create what they call price parity," said Barnard. "That is impossible. You can't do that with Wal-Mart. That's like having the state of Luxembourg declare war on the United States."

Conaway has undertaken strategic initiatives to enhance the company's inventory and information systems since he took the helm in May of 2000. But Burde says customers have still been unable to find products on Kmart's shelves.

"Chuck Conaway has achieved some measure of success and started to make improvements in the supply chain, but we're not seeing it in terms of the type of sales they need to get," she said.

Long Road Ahead

Conaway also brought new marketing initiatives and attractive new merchandise to make the stores' offerings more appealing. The retailer signed a long-term merchandising agreement with Martha Stewart earlier this year to carry her Martha Stewart Everyday products until 2008, and also brought back its BlueLight Specials offering savings on brands and products in April.

In a pre-taped statement released by the company today, Conaway expressed confidence over some of Kmart's upcoming developments.

"[Customers] will see a number of new merchandising initiatives that we'll be able to expedite, particularly two new great brands, Joe Boxer, which I'm very excited with, as well as Disney, and they'll see a much more expanded Martha Stewart presence." (Disney is the parent company of ABCNEWS.com.)

But none of Kmart's initiatives thus far seems to have overcome the company's problems with suppliers. Analysts say the company has been slow in paying its vendors since November.

Further, though Martha Stewart has said she has no plans to abandon her marketing agreement with the company, this latest chapter in Kmart's history has some industry watchers expecting the domestic doyenne to peddle her wares elsewhere.

While company now has the opportunity to sort itself out, analysts say the company's path will not be easy. Nemiroff says the retailer's next course of action should be focusing on recovery.

"Trim the fat. Try to get back on track. Try to steal some ideas from Wal-Mart or from their competitors to see how they can service the consumers better," said Nemiroff. "How they can get people back into the stores. That's their biggest problem."

ABCNEWS' Richard Davies, Paul James, Ramona Schindelheim and Catherine Valenti contributed to this article

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