Could Chapter 11 Be in Cards for Kmart?

Amid speculation about discount retailer Kmart's financial future, the company announced today that it has ousted chief operating officer Mark Schwartz.

The embattled retailer also named James B. Adamson, one of its board of directors, to be chairman, replacing Charles Conaway, who will remain as chief executive.

The management changes come in the wake of a string of bad news that has led many analysts to believe that the beleaguered retailer could be filing for Chapter 11 bankruptcy.

Investors nervous about the company's fundamentals have sent Kmart's shares plummeting around 73 percent since the beginning of the year. Standard & Poor's said that it would take Kmart out of its S&P 500 index at the close of trading on Wednesday.

While the recession has made the environment for retailers tough in general, Kmart has had a tougher time of it.

Not only has the company announced that weak December sales would cause it to miss analysts' earnings estimates for the fiscal year ended Jan. 30, 2002, but credit rating agencies Moody's Investors Service and Standard & Poor's have each downgraded their credit ratings on the discount retailer.

The company's board met Tuesday to reportedly discuss various options for the troubled company, including a Chapter 11 bankruptcy filing. A Kmart spokeswoman said she could not disclose what was on the board's agenda.

But the cloud of negativity surrounding the company has made many industry watchers wonder whether or not the company can turn its fortunes around.

Heated Competition

Competition from more nimble discount retailers like Wal-Mart and Target has made it a difficult environment for Kmart to compete in, say analysts.

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," says Kurt Barnard, president of Barnard's Retail Trend Report in Montclair, N.J. "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."

Kmart chairman Chuck Conaway has undertaken strategic initiatives to enhance the company's inventory and information systems since he took the helm in May of 2000. But Standard & Poor's analyst Mary Lou 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 says.

Credit Risk

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 the domestic doyenne's Martha Stewart Everyday products until 2008, and also brought back its BlueLight Specials offering savings on brands and products in April.

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

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