Tags: Kmart | Files | for | Bankruptcy | Protection

Kmart Files for Bankruptcy Protection

Tuesday, 22 January 2002 12:00 AM

Kmart, known for low prices but poor service, has struggled in the fiercely competitive discount market against rivals such as Wal-Mart and Target.

In its filings in the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, the retailer indicated it would reorganize quickly and has targeted emergence from Chapter 11 in 2003.

Kmart also announced that, to fund its turnaround and continuing operations, it has 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 JPMorgan Chase Bank, which will act in various capacities, including as collateral monitors, documentation agents and syndication agents.

The debtor-in-possession facility, which remains subject to bankruptcy court approval, will be used to supplement the company's cash flow during reorganization.

Kmart said JPMorgan Securities Inc. and Fleet Securities Inc. arranged the financing.

The company said it expected to be able to access $1.15 billion of the debtor-in-possession facility upon court approval of an interim financing order; the full facility is subject to final court approval at a later date.

Kmart said its decision to seek judicial reorganization was based on factors including a rapid decline in its liquidity resulting from Kmart's below-plan sales and earnings performance in the fourth quarter, the evaporation of the surety bond market, and an erosion of supplier confidence.

Other factors include intense competition in the discount retailing industry, unsuccessful sales and marketing initiatives, the recession, and recent capital market volatility.

Charles C. Conaway, chief executive officer of Kmart, said, "We are committed and determined to complete our reorganization as quickly and as smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future.

"We deeply regret any adverse effect today's action will have on our associates, vendors and business partners. I also regret the impact of our filing on all Kmart shareholders, including many of our associates. But after considering a wide range of alternatives, it became clear that this course of action was the only way to truly resolve the company's most challenging problems," he said.

Conaway said he was 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."

Kmart, which operates 2,114 stores, also announced Ronald B. Hutchison has been named executive vice president and chief restructuring officer, a new position, effective immediately.

He and James B. Adamson, who was elected non-executive chairman of Kmart's board of directors Thursday, will advise Kmart on reorganization matters and work with senior management to rebuild and reposition the company.

Kmart said it would evaluate the performance of every store and terms of every lease by the end of this quarter to close unprofitable or underperforming stores this year and increase cash flow and return on invested capital.

The retailer said it would seek bankruptcy court approval to immediately terminate the leases of about 350 stores closed previously by Kmart or being leased by other tenants at rents below Kmart's obligation, thereby resulting in an immediate annual savings of approximately $250 million.

The company plans to pursue opportunities to reduce annual expenses by an additional $350 million through reengineering the organization, staff reductions, office consolidations and other actions.

Kmart's slide into bankruptcy isn't surprising given the events over the past month. In December, it reported a decline in year-over-year sales, while rivals such as Wal-Mart continued to chock up gains at its expense.

The retail giant last week unveiled sweeping management changes, naming a turnaround specialist as chairman in the hopes of reviving the company's fortunes.

Over the weekend, two of Kmart's suppliers stopped shipping goods amid worries over the viability of the struggling retailer.

Tuesday, immediatedly after the filing, Dallas-based Fleming responded to the announcement by Kmart.

"First and foremost, the Kmart filing helps define the path forward in our relationship. Kmart's debtor in possession financing gives it the critical liquidity needed to fund its operations during the reorganization process, a necessary first step in resuming our relationship," said Mark Hansen, chairman of the board and chief executive officer of Fleming.

"Additionally, Kmart's reorganization can be an opportunity to close underperforming, high-cost-to-serve stores and redirect capital toward efficient, highly productive discount stores and supercenters. We believe today's filing provides Kmart the opportunity to better focus company resources on these top performing assets," he said.

Hansen noted the powerful and positive effect of Kmart supercenters for Fleming. Fleming typically delivers about five times the volume of merchandise to a Kmart supercenter compared to a traditional discount store.

Kmart's filing has almost no effect on Fleming's comprehensive business strategy or its service to other customers. While Kmart is Fleming's largest customer in sales volume, business with other retail customers continues to grow at a significant rate.

Fleming said it intended to resume delivery of food and other consumable products to Kmart upon receiving satisfactory assurances via the bankruptcy court.

Fleming's business arrangement with Kmart includes a seven-day invoice and payment cycle. The company believes the short payment term for product shipments to Kmart limits Fleming's exposure.

Meanwhile, on Monday, Moody's Investors Service downgraded the long-term ratings of Kmart Corp. senior unsecured to Caa3 and left the ratings on review for further possible downgrade.

Moody's said the move was "against a backdrop of declining confidence, including reports that certain key suppliers have stopped shipping to Kmart."

The rating agency said, "While the company has said that it is continuing discussions with its lenders regarding existing and possible supplemental financing facilities, there continues to be little clarity at this point in time about either the company's liquidity position or its business plan for 2002.

"With the passage of time, Kmart's options are narrowing and its prospects of being able to secure financing outside bankruptcy are diminishing," Moody's said.

Moody's said its review would focus on the company's plans for financing its operations, including the terms of any new financing and its implications for the relative status and recovery value of existing rated debt.

"Even if Kmart is able to secure sufficient financing for its 2002 business objectives, the company's weak operating performance and the widening competitive gap against peers have created significant uncertainty about the prospects of the company's franchise longer term," Moody's said.

Moody's said its review would assess management's plans to deal with these challenges, including the extent to which its turnaround strategy requires significant downsizing of Kmart's store base and sizable expenditures to achieve necessary improvements in the company's weak supply chain systems and store operations.

Copyright 2002 by United Press International.

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Kmart, known for low prices but poor service, has struggled in the fiercely competitive discount market against rivals such as Wal-Mart and Target. In its filings in the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, the retailer indicated it...
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Tuesday, 22 January 2002 12:00 AM
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