Kmart Seeks Bankruptcy Protection
Kmart Corp., an institution that used discounted prices and Blue Light Specials to reach out to blue-collar America, on Tuesday became the largest retailer to seek protection in bankruptcy court.
The bankruptcy filing, which listed $16.3 billion in assets and $10.3 billion in liabilities, is expected to eventually result in the closure of hundreds of stores and layoffs for some of Kmart’s roughly 250,000 employees nationwide.
The Troy, Mich.-based retailer, whose roots date back to 1899, said it secured $2 billion in financing that will allow the company to operate while reorganizing under Chapter 11 of the U.S. Bankruptcy Code.
The widely anticipated filing was welcomed by analysts and some of Kmart’s vendors, whose support will be critical to the company’s turnaround efforts. Martha Stewart, Kmart’s best-known brand, said Tuesday that it was sticking by the retailer.
Kmart said it planned to emerge from bankruptcy in 2003, and Tuesday the nation’s second-largest discount retailer began the task of determining which of its approximately 2,100 stores should close. Kmart has 164 outlets in California, about half of them in Southern California. All of Kmart’s stores were operating Tuesday, although some shoppers complained that shelves were not properly stocked.
The company blamed the bankruptcy on increased competition, poor holiday sales and the recession, a series of unsuccessful sales and marketing initiatives and, most recently, an erosion of support among its vendors. Kmart sought unsuccessfully to secure a bailout from lenders, and the company suffered a particularly stinging blow last weekend when Fleming Cos., its only grocery supplier, halted shipments after Kmart failed to make a regular weekly payment.
The bankruptcy filing and the $2-billion cash infusion are “the best news that has come out of Kmart in some time,” said Kurt Barnard, president of Barnard’s Retail Trend Report, an industry publication in New York.
Although Kmart’s problems have been mounting for years, its rapid fall into bankruptcy came after investors pummeled the company’s stock in recent weeks and rating agencies downgraded its debt. Kmart’s financial strain stemmed largely from the company’s fierce battle against Wal-Mart Stores Inc., the nation’s low-price leader, and Target Corp., which offers trendier merchandise.
Analysts said those companies have created clearer brands.
“Kmart is being squeezed at both ends,” said Jeff Parkhurst, a director with Interbrand, a New York-based brand and corporate identity consulting firm. “They don’t have the market on trendy merchandise and they don’t have the market cornered on cost. They don’t have much of anything right now.”
Kmart is expected to use bankruptcy to shed many unprofitable leases and reduce other costs that are stalling its attempted restructuring. The $2 billion in financing will give Kmart cash needed to stock its store shelves.
The company said it was seeking Bankruptcy Court approval to terminate the leases of about 350 stores that were closed by Kmart and are being leased by other tenants. That would save the company about $250 million.
Kmart also said it has hired Ronald B. Hutchison as executive vice president and chief restructuring officer. Hutchison, 51, was formerly chief financial officer at Advantica Restaurant Group Inc. and worked with James B. Adamson, a turnaround expert who Kmart tapped last week as its chairman.
As the two men work together to reposition Kmart, they face numerous challenges in winning the confidence of shoppers, vendors and investors.
Grocery supplier Fleming had not resumed shipments as of Tuesday, said company spokesman Shane Boyd, who added that Fleming would “be able to resume shipping immediately once they’ve [Kmart] been able to demonstrate they can meet their commitments.”
Kmart must keep shelves stocked if it hopes to win consumers back. “You go around and you cannot find anything in all this mess,” said Laurie Francisco, 47, a nursing assistant who was shopping at a Los Angeles Kmart store Tuesday.
Loyal customers, including many with modest incomes who have come to rely on Kmart’s sale items, worried that Kmart’s cost cutting might result in nearby stores closing. “This store is like my house. I know where everything is,” said Nilda Zuloaga, 73. “I don’t want it to close.”
Analysts agree that a key to Kmart’s future will be keeping brands that set it apart--including Martha Stewart, Sesame Street, Disney and Thom McCan. “If you lose those, then Kmart just becomes a very poor version of Wal-Mart and they won’t survive long term,” industry analyst Eric Beder said.
Martha Stewart Living Omnimedia Inc. said in a statement Tuesday that it is optimistic about Kmart returning to financial health. The company said Kmart will continue to sell Martha Stewart Everyday brand products “for the foreseeable future.” Martha Stewart sales in Kmart stores total about $1.5 billion annually.
Attorneys who’ve studied the contract linking Martha Stewart Living to Kmart say it’s not probable that the high-profile consumer-goods company can break away from Kmart. Although the contract includes language that seems to give Stewart’s firm the right to part company with Kmart after a bankruptcy filing, “the provisions track right along with bankruptcy code provisions that negate the clauses,” said Lynn M. LoPucki, a UCLA law professor.
Martha Stewart Living did have a right to part company with Kmart before a bankruptcy filing, LoPucki said, “but they didn’t do it before the filing and it’s clear that they can’t do it after the bankruptcy.”
The complex bankruptcy filing included papers for 38 Kmart entities, including the flagship Kmart Corp. The cases were consolidated in a hearing Tuesday in Chicago, where Kmart filed for bankruptcy. The petition lists assets of nearly $16.3 billion, surpassing the bankruptcy filing in 1990 by Federated Department Stores, which had been the retail industry’s largest Chapter 11 case. Kmart listed debts of more than $10.3 billion, with the top 50 unsecured creditors holding about 42% of the debt, or $4.3 billion worth of loans, debt securities and products and supplies.
Several pension and retirement funds were among 50 creditors listed by Kmart. The Wisconsin Investment Board had invested $30 million in Kmart debt securities, but any drop in value isn’t expected to have much of an effect because the diversified fund has about $60 billion in assets, a manager said.
The biggest single group of unsecured creditors are holders of nearly $2.8 billion in debt securities.
Loans from the four next largest creditors--BankBoston, Chase II, Bank of New York and Credit Suisse First Boston--total $425 million.
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Times staff writers James S. Granelli, Abigail Goldman and Laura Lok contributed to this report.
