Kmart Seen on Brink of Bankruptcy
Kmart Corp. edged closer to Bankruptcy Court on Monday after its sole supplier of groceries halted critical shipments to the nation’s second-largest discount retailer.
Fleming Cos. said it took the action because Kmart failed to pay about $70 million that was due Friday. Fleming’s move could prompt other Kmart vendors to follow suit, and, analysts said, it sharply increases the likelihood that Kmart will file for bankruptcy protection.
“We are dealing with a crisis of confidence on the part of vendors,” said Kurt Barnard, president of Barnard’s Retail Trend Report, an industry publication in New York. “This is a very serious crisis,” Barnard said. “It seems to be well on its way to undermining Kmart’s ability to remain as a going concern.”
Kmart has about 2,100 stores and 250,000 employees across the country. The 105-year-old retailer operates 164 stores in California--about half of them in Southern California--as well as a major distribution center in Ontario.
Kmart, based in Troy, Mich., was once the nation’s preeminent discount retailer, but has taken a stunning fall in recent years under competitive pressures from price-leader Wal-Mart Stores Inc. and more trendy Target Corp.
Kmart’s stock last week plunged to its lowest level in more than three decades. Although Kmart is seeking additional financing, a bankruptcy filing by Kmart would rank as one of the largest among retailers that include once-venerable names such as Montgomery Ward and Carter HawleyHale Stores, parent of the Broadway department store chain.
The uncertainties surrounding Kmart have prompted some of Kmart’s vendors to delay shipments. But Fleming appears to be the biggest supplier to date to withhold new supplies, and analysts say that could spur others to do the same.
Shortly after Fleming’s announcement Monday, Scotts Co., which supplies lawn and garden products to Kmart, disclosed that last week it began delaying shipments to the retailer because of the “uncertainty surrounding Kmart’s financial situation.”
Those uncertainties were apparent Monday to Kmart shoppers, who said they noticed some gaping holes in some of the store’s food sections. At the Big K in Burbank, eggs and sliced bread were in short supply, and there were empty spaces where cocoa, nondairy creamer and canned tuna should have been. Popular items such as Doritos and Kraft macaroni and cheese were lined up in single rows at the front of shelves, disguising empty spaces behind them.
Burbank retiree Roy Biederman, 72, scanned the shelves for the Ritz crackers featured in an ad. “I can’t find the ones that I wanted,” he complained, grabbing another variety of crackers instead.
Kmart came off disappointing holiday sales, and its stock has been pummeled recently after bleak assessments from analysts and repeated downgradings from ratings agencies.
Some analysts have been expecting Kmart to take refuge in Bankruptcy Court, saying that a Chapter 11 filing would enable the company to free itself of leases on hundreds of stores that are making little or no money.
The company has said it is working through “financial issues,” including negotiating to secure a multibillion-dollar credit line. But the retailer has declined to comment specifically on its future strategy.
Fleming, the nation’s second-largest distributor of groceries, said it intends to resume delivery to Kmart when Fleming receives “satisfactory assurance of Kmart’s performance.” For now, Fleming said, only some perishable food already en route to Kmart was allowed to be delivered.
“We have to protect our company’s interest as well so we’re taking the appropriate steps to do so,” Fleming spokesman Shane Boyd said.
Kmart is Fleming’s largest customer, generating $4.5 billion in annual sales for the Dallas-based food supplier, Boyd said.
In a statement issued by Fleming, Kmart Chief Executive Chuck Conaway said Kmart’s alliance with Fleming has created a more efficient supply chain that made consumables “a strength of our operation.” He said Kmart was looking forward to resuming its “critical business relationship” with Fleming, but did not say when delivery of groceries might resume or how long its current food supplies would last. Kmart officials could not be reached Monday.
Until last summer, Kmart received food from about 20 suppliers, Boyd said, the bulk of it coming from Fleming and SuperValu. But in June, Kmart and Fleming struck an agreement that made Fleming the sole supplier. Although it was unclear how long Kmart’s food supplies would hold up, analyst Barnard said, perishable items must be restocked in a matter of days.
Analysts have said poorly stocked shelves and messy stores have been part of Kmart’s problems. Although the company has made strides in these areas recently, some say it still has plenty of room for improvement.
“Kmart is spotty,” said Marie Driscoll, an analyst with Argus Research. “Some stores are really wonderful. Some stores are deplorable,” she said, noting that some have dirty floors and messy parking lots.
Kmart still has many loyal customers, including DeWayne Kinsfather, a 64-year-old gardener who has shopped at a Costa Mesa store since he moved to the city 29 years ago.
“I’d sure hate it if they closed this one,” said Kinsfather, stooping down to look for lightbulbs on one of the lower shelves. “You get used to something.”
It’s not clear yet how much of a hole the closure of Kmart stores would leave on the retail landscape, or what effect it would have on the communities and shopping centers where the stores have done business for decades.
Kmart’s history can be traced to 1897, when Sebastian Kresge and John McCrory opened five-and-dime stores in Memphis, Tenn., and Detroit. S.S. Kresge Co. incorporated in 1912 and became one of the nation’s largest general merchandisers. The company entered discount retailing in 1958 and opened the first Kmart store in Detroit in 1962.
