Kmart loss 'disappointing,' but not unexpected - company reports loss, negative comparable-store sales

DSN Retailing Today, April 7, 2003 by Debbie Howell

TROY, MICH.--While Kmart's monstrous loss of $3.22 billion for fiscal 2002 came as expected, recent financial results show slight signs of progress as the retailer positions itself to exit bankruptcy later this month.

Even though the company lost money in January and February and comparable-store sales continue to be negative, Kmart is slowly recovering, according to ceo Julian Day, who briefed the press in a March 24 conference call.

"We are cautiously optimistic as the February results start to hint of this progress," Day said, noting $385 million in positive cash flows for the month.

Kmart reported sales of $30.76 billion for the year, a 15% drop due in part to the closure of 283 stores in 2002. Comps declined 10.1% for the year and 9.8% in the fourth quarter. The negative comp trend continued into 2003, with same-store sales declining 8.9% in January and 2.5% in February.

Day did admit that Kmart has disappointed and lost shoppers during its period in bankruptcy and that regaining that trust wouldn't be easy. But if all goes as planned and the company exits bankruptcy on April 30, Kmart will be able to concentrate on improving its stores and refining its niche as a high-low promotional retailer with an emphasis on exclusive brands, Day said.

"Once emerged, we will then be able to focus all of our time and resources on further refining and improving our business," he said.

Day said Kmart accomplished several key objectives during the bankruptcy process, which included strengthening the store portfolio, cutting costs and reducing debt. Kmart is currently closing 316 stores, of which 57 are supercenters. Kmart's ongoing store base will be about 1,500 units, one-third smaller than the 2,114 it operated when filing Chapter 11 in January 2001.

Progress continues to be made on cost control, said cfo Al Koch, noting a $67 million decline in selling, general and administrative expenses for February. Meanwhile, changes resulting from an ongoing analysis of the merchandise mix helped grow gross margins to 21.6% of sales for the month.

So far, Kmart has cut between 10% and 12% of its SKUs and continues to refine its mix, though there are no plans to completely exit any category; Day said.

Regarding the status of a new prototype being tested in White Lake, Mich., and Peoria, Ill., Day said no roll-out is planned currently, as the company continues to tweak and evaluate the format, which features wider aisles, a green color scheme and several layout changes. Four of the stores have been "trading strongly up," Day said, with results mixed at the fifth unit.

Meanwhile, the bankruptcy court has approved Kmart's settlement of claims from its former grocery supplier, Fleming. Fleming will receive $37 million in cash rather than the $1.5 million it sought when Kmart terminated the 10-year contract. Kmart is now using regional wholesalers for perishables delivery and handling other grocery items itself. Though bumpy at first, Day said the transition went well and that Kmart's in-stock level is "at least as good as it was when Fleming was providing those perishable goods."

When the switch occurred, Day said there were some isolated out-of-stock incidents, and at least two Super Kmarts had "committed the cardinal sin of allowing themselves to be out of milk." That was immediately corrected, he said.

As for progress at exiting bankruptcy, Day said the case is in its final stages. Day said voting by creditors on the amended plan of reorganization was under way, with a confirmation hearing on the plan scheduled April 14 to 15. If the court approves the plan, Kmart will exit bankruptcy on or about April 30.

Priorities upon exiting bankruptcy will be to drive profitable same-store sales, reduce expenses further without sacrificing customer service and improve inventory productivity, Day said.