Some Suppliers of Kmart Want Payment Upfront : Retailing: The chain says it was current on its accounts as of Friday. But investors are worried about liquidity.
Kmart is behind in its payments to some suppliers and some of them are demanding cash or a letter of credit before making any more shipments to the troubled retailer, a credit- consulting firm said Monday.
Kmart is about 30 days delinquent on payments to three of his clients, said Howard Raab, president of Park Avenue Transglobal Financial Services Inc. of Los Angeles, which advises manufacturers on the credit-worthiness of retailers.
Rumors of trouble at the big discount retailer rocked its stock price last week, but Kmart said at the time that it was paying its suppliers on time.
“As of Friday, we were current,” Kmart spokeswoman Mary Lorencz said Monday. “Without knowing who these [suppliers] are, it’s hard to say we are delinquent. To my knowledge we’re not.”
Some Wall Street investors have raised questions about Kmart’s liquidity in light of the company’s recent efforts to renegotiate covenants that would require the retailer to make immediate bond payments of $681 million if a credit-rating company downgrades those bonds to below investment grade.
Some investors fear that Kmart would be unable to make such payments. Under that scenario, some investors believe Kmart could be forced to file for protection from creditors and reorganize under Chapter 11 bankruptcy laws.
On Monday, Standard & Poor’s, which announced in October it was considering a downgrade, said it will not make a decision about Kmart’s rating until the week of Jan. 8.
This gives Kmart “an adequate period of time” to reach a deal with holders of the real estate debt, said William Wetreich, managing director of Standard & Poor’s.
Kmart executives have said the company is still negotiating the covenant issue with the banks and insurance companies that hold those bonds. The company has said it has no plans to file for bankruptcy.
Wall Street analysts have said they believe any bankruptcy filing would await the outcome of the all-important holiday shopping season.
Raab, citing client confidentiality commitments, would not disclose the names of the suppliers. He said Kmart has not yet paid a past-due bill from a major consumer electronics firm and overdue bills from two other clients.
“There isn’t even a [Kmart] commitment on when payment will be made,” Raab said.
On his advice, Raab said, the three suppliers will not ship additional products to Kmart unless the retailer produces a letter of credit or pays cash on delivery or in advance. Kmart has not ordered new supplies from those vendors, Raab said.
However, he said Kmart recently placed a $15-million order with another client, a producer of electronic games. That manufacturer has also decided not to ship products unless Kmart produces a letter of credit, a wire transfer payment or cash on delivery, Raab said.
Kmart spokesman Bob Burton acknowledged that the lack of a resolution is having a negative impact on Kmart’s dealings with suppliers.
If a substantial number of suppliers decide to withhold shipments, Kmart could be forced into bankruptcy, said Richard Nelson, a retail analyst at Duff & Phelps in Chicago. Such a development is unlikely in the short term because most suppliers and credit-rating agencies will wait until after Christmas to make decisions on Kmart, Nelson said.
“A lot depends on their sales in December,” Nelson said. “Any action the credit-rating agencies take after Christmas will be critical. We’ll know a lot about their fate after Christmas.”
However, others doubt that such major decisions will be made that soon. Kurt Barnard, president of the New Jersey-based Barnard’s Retail Marketing Report, said Kmart’s bondholders and suppliers will probably cooperate with the company in the next few months.
“They have too much to lose in a bankruptcy,” Barnard said. “If Kmart files Chapter 11, the banks, insurance companies and [suppliers] won’t get a dime immediately because everything would go to Bankruptcy Court and there may not be payment for years. If there is a bankruptcy filing, it probably wouldn’t happen until the middle part of next year.”
Kmart has been losing ground to discount rivals Wal-Mart and Target in recent years and losing money in 1995. It reported a $69-million loss in the third quarter of 1995, contrasted with a profit of $39 million for the same period a year ago. Company officials attributed the loss to heavy price cutting.
Barnard said the company’s new chief executive, Floyd Hall, is aiming to boost sales by 10% next year. Hall will chair a regularly scheduled meeting of Kmart’s board today at the company’s headquarters in Troy, Mich.
Hall, a native Californian who formerly headed Target, took the reins at Kmart in June. He succeeded Joseph Antonini, who left the top post early this year because of pressure from unhappy investors.
Investor concern has been reflected in recent stock market trading. On Friday, Kmart shares tumbled $1.125 to $6.375 on the New York Stock Exchange, its lowest price in 13 years. The stock declined 37.5 cents on Monday, closing at $6.
* Reuters contributed to this report.
