Ailing Kmart’s Shares Fall 35%
Kmart Corp.’s battered shares tumbled 35% more on Wednesday as credit agencies slashed ratings for the nation’s second-largest discount retailer to highly speculative levels amid ongoing concerns that the company may file for bankruptcy.
Two major rating agencies, citing lack of information about how the company plans to get its business back on track, cut their credit ratings.
Standard & Poor’s dealt the company an additional blow when it removed the company from its widely watched S&P; 500 index after the close of trading. The move forces mutual funds who tie their investments to the index to unload the stock.
As the bearish developments unfolded, Kmart’s stock slumped 85 cents to $1.60 on the New York Stock Exchange, its lowest level in more than 3 1/2 decades. A total of 178 million shares changed hands, making the stock the most active in U.S. markets.
Although Kmart has declined to comment after two days of meetings by the board, analysts and retail experts said a bankruptcy filing would allow Kmart to close hundreds of poorly performing stores.
As many as 400 of the company’s 2,100 stores are either unprofitable or not making much money, said analyst Marie Driscoll with Argus Research.
“There’s a lot of stores they should get rid of that are really draining the financial and managerial efforts of this company,” she added.
But management’s silence may indicate that the company is pursuing options other than bankruptcy, she said.
“Nothing has been revealed at this point, and the stock just continues to drop,” she added.
Meanwhile a consultant warned that most of the retailer’s suppliers could halt deliveries as early as Friday if the company keeps mum, according to Dow Jones.
About one-third of Kmart’s suppliers have stopped deliveries outright and another third were holding deliveries until there is further word from the company, said Burt Flickinger III, who met with manufacturing groups. He is a managing partner at Reach Marketing in Connecticut.
Kmart has been losing a bruising battle with two other retail giants, Wal-Mart Stores Inc., which often beats Kmart’s prices, and Target Corp., which many shoppers consider a trendier option.
The Troy, Mich.-based retailer lost further ground to its competitors when it suffered disappointing sales during the holiday shopping season, casting doubt on an ambitious plan to spend billions of dollars on inventory controls, new distribution centers and conversion of standard stores to super centers.
“People are looking at how are they going to execute their strategy with less cash than they thought they would have,” Driscoll said.
On Wednesday, Standard & Poor’s and Moody’s Investors Services cut Kmart’s ratings to a low junk-bond grade, and Moody’s warned of possible further downgrades. Fitch Inc. also lowered certain Kmart debt.
Although Kmart is attempting to arrange more financing, there is little clarity about the company’s financial plan “to support its 2002 business objectives,” Moody’s said in a statement.
A bankruptcy also might cloud Kmart’s exclusive agreement with lifestyle guru Martha Stewart’s merchandise in its U.S. stores.
Both sides can pull out of the agreement if either files for bankruptcy, but Stewart said late Wednesday in an interview with CNN that she has no intention of severing the relationship, which gives Kmart a well-known brand that draws shoppers and sets it apart from competitors.
Stewart’s company--Martha Stewart Living Omnimedia Inc.--reaps annual sales of $1.5 billion as a result of the association, analysts say. Kmart spokeswoman Julie Fracker said the retailer also expects the association to continue.
Other vendors also were wondering whether the turbulence at Kmart will smudge their bottom lines, but others expressed confidence in the company.
Wayne Diamond, chief executive of Designer Dress 98 in New York, which makes dresses and sportswear for Kmart, said he has not interrupted any shipments to the retailer and expects the company will emerge from its current difficulty “smelling like a rose.”
Although firms that guarantee payments to wholesalers often determine whether shipments are interrupted, Diamond said he shipped goods valued at $5 million to the retailer at his own financial risk when Kmart was struggling four years ago, and did not regret it.
“They employ 225,000 people in America,” he said. “The country needs a competitor out there for Wal-Mart and Target to keep prices fair and to keep the garment center itself strong.”
Kmart has laid off some workers at its stores and distribution centers recently, spokeswoman Fracker said, but she described the job losses as “routine seasonal adjustments.” Workers who lost jobs but were not hired just for the holidays could be rehired soon if business warrants it, she said.
“Many of the workers that were affected will likely be called back in February,” she said. Fracker declined to say how many people were laid off.
Some real estate investment firms that lease sites to Kmart also have seen their stocks fall. Shares of Malan Realty Investors Inc., which has 27 Kmart locations, slumped to a 52-week low Wednesday and have fallen 15% this month. The stock closed at $5.69, off 27 cents a share, on the NYSE.
Real estate investment trusts rent 235 stores to Kmart, generating annual rental income of $110 million, according to Credit Suisse First Boston.
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Bloomberg News was used in compiling this report.
