Kmart files for Chap. 11

Alexandra R. Moses

Tuesday, Jan. 22, 2002 | 10:54 a.m.

DETROIT -- Kmart Corp., known for its BlueLight Special and discount prices, filed for bankruptcy protection today, becoming the largest retailer ever to seek shelter from creditors under Chapter 11.

Kmart has struggled in the fiercely competitive discount market against rivals like Wal-Mart and Target. Debt rating agencies, including Standard & Poor's, have in recent weeks lowered their credit ratings for Kmart.

The filing comes a day after a major food distributor, Fleming Cos., said it had cut off most shipments to Kmart because the discounter failed to make its regular weekly payment for deliveries. Fleming said Kmart, its largest customer, owes $78 million.

Other suppliers have delayed or stopped shipments to Kmart in recent days, but the Fleming situation posed perhaps the biggest crisis yet, because grocery offerings often drive traffic.

In morning trading on the New York Stock Exchange, Kmart shares tumbled 58 percent, or $1.02 a share, to 72 cents. It had traded as high as $13.55 a share last summer.

Kmart, based in Troy, Mich., made the filing in U.S. Bankruptcy Court in Chicago.

The company said that it will reorganize on a fast-track basis and hopes to emerge from Chapter 11 in 2003. Kmart said in its release that it would keep its 2,114 Kmart stores open.

"We are determined to complete our reorganization as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," Kmart CEO Chuck Conaway said in a statement.

Kmart's bankruptcy declaration is the largest in the retail business since Federated Department Stores Inc. filed for Chapter 11 in 1990 and emerged two years later.

Federated Department Stores at the time had assets of $11.4 billion when it filed in January 1990. Kmart's assets in its latest SEC filing were just over $17 billion.

Kmart said in a release it had secured a $2 billion senior secured debtor-in-possession financing facility from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and J.P. Morgan Chase Bank.

Since the beginning of the year, Kmart's stock has plummeted and the company was removed from S&P's benchmark index of 500 leading stocks. Last week, Kmart named a new chairman, turnaround expert James B. Adamson, to replace Conaway, who remains as chief executive. The company's president, Mark S. Schwartz, left the company.

Kmart named Ronald B. Hutchison as chief restructuring officer, a new position, effective today. Hutchison, 51, was most recently chief financial officer of Advantica Restaurant Group Inc., where he and Adamson were instrumental in the company's successful reorganization.

The holiday shopping period didn't help Kmart rebound. The company said that for the five-week period ended Jan. 2, 2002, the close of its fiscal year, net sales slipped 1 percent on a same-store basis from the previous year.

Sales for the period were $5.52 billion, down slightly from $5.54 billion for the same period last year, Kmart said.

Wayne Hood, retail analyst with Prudential Securities Inc., said Kmart has to restructure its debt, close unproductive stores and streamline at the corporate level.

Since Conaway became Kmart's CEO in May 2000, he has closed unproductive stores, reintroduced the BlueLight Special, and made other changes to help the discount retailer become more productive and more efficient.

The BlueLight Special marketing tool, first introduced in 1965 and retired in the 1990s, offers customers lowered everyday prices on more than 30,000 items.

Despite its current woes, Kmart has seen improvements since it was at the brink of death in the mid-1990s, when the company suffered heavy losses, closed stores and laid off employees.

The Martha Stewart Everyday brand, which covers such products as sheets, towels, paints and kitchenware, is Kmart's largest volume-producing label, generating about $1 billion in sales last year.

Martha Stewart officials could not be reached for immediate comment today.

Martha Stewart Living Omnimedia has a provision in its contract that allows Stewart to exit Kmart in bankruptcy, but it would have to be approved by a bankruptcy judge. As of last week, Sharon Patrick, Martha Stewart president and chief operating officer, said she was not looking to exit from Kmart at this time.

Analyst Michael Bernacchi, a professor of marketing at the University of Detroit Mercy, said Kmart suffers because it isn't seen as deep a discounter as Wal-Mart, and it doesn't have the upscale touch that the Minneapolis-based Target portrays.

Kmart has about 275,000 employees and its stores in all 50 states, Puerto Rico, U.S. Virgin Islands and Guam.