Despite upbeat marketing message, Ch. 11 looms - Kmart, bankruptcy proceedings - Brief Article

DSN Retailing Today, August 12, 2002 by Debbie Howell

CHICAGO -- Kmart's newest television commercials may feature an exuberant man dancing in his underwear, but the company is still up to its britches in Chapter 11 proceedings--the scope and depth of which is only intensifying. Among the current considerations facing Kmart are further job cuts, an extension to file its reorganization plan, the all-important back-to-school selling season, the nagging issue of exclusivity contracts and a seemingly endless investigation into "stewardship" issues that may include questionable accounting procedures and actions by former executives.

And that's just another day in court for the beleaguered retailer, which met in Chicago last month for its regularly scheduled Omnibus hearing. U.S. Bankruptcy Court Judge Susan Sonderby gave the retailer a six-month extension--until the end of February 2003--to file a reorganization plan. The original date was Aug. 7.

The later deadline raises questions of whether the retailer can exit bankruptcy by the mid-2003 deadline initially set by management, who have been hedging that the stated date appears to be increasingly difficult to meet. During the most recent court appearance, Kmart attorney Jack Butler alluded to the possibility that the company may not emerge until sometime in 2004.

Sonderby also approved a motion allowing Kmart to assume the license agreement for its Route 66 line of proprietary clothing, approved the retention of legal and financial advisors for the newly formed Equity committee and green lit the sale of a single corporate jet from the company's fleet. Five company planes remain, though Kmart is seeking to sell two more jets, according to spokesman Michael Freitag.

But the judge denied Kmart's request to hire law firm Dewy Ballantine LLP to represent directors of the company's board as the stewardship investigation drags on longer than expected. Butler said the review will conclude by the end of this year, rather than Labor Day, as previously stated. The process, he said, is being delayed by the company's inability to identify and interview writers of the anonymous letter sent to management earlier this year that launched the investigation. Kmart plans to refile its request to retain Dewy Ballantine under a different section of the bankruptcy code, per Sonderby's direction.

Jim Adamson, Kmart chairman and ceo, said the bankruptcy was going along as "swimmingly" as could be expected and that he hopes to have the company "stabilized" by the end of this year, indicating the losses and comp store declines will be stemmed. Nor will there be any additional store closings this year as Kmart heads into the two most crucial tests for any retailer: back-to-school and the December holiday shopping seasons. The 283 stores shuttered earlier this year following the filing constituted Kmart's most obvious underperforming units, and the viability of the remaining stores will be tested through the fourth quarter.

However, there are expected to be additional layoffs in the next couple of months, according to Ron Hutchison, Kmart's chief restructuring officer. The cuts will likely come at headquarters, and Kmart will next look at the distribution system to see where rationalization might make sense, said Adamson.

July sales have been soft, he said, but inline with what other retailers are reporting for the month. Nevertheless, it may be a while before executives join their newest representative in doing the Joe Boxer Boogie.