[url]http://www.nytimes.com/2002/01/22/business/22SHOP.html[/url]

Kmart on Verge of Filing for Bankruptcy

January 22, 2002

Kmart on Verge of Filing for Bankruptcy
By STEPHANIE STROM and LESLIE KAUFMAN

he Kmart Corporation (news/quote), the nation's third-largest discount
retailer, is expected to seek bankruptcy protection as early as this
morning in Michigan, where it has its headquarters, advisers to the
company say.
It would rank as the largest retail bankruptcy proceeding on record. The
record is now held by Federated Department Stores (news/quote) and a
sister company, Allied Stores, which filed in 1990.
Jack Ferry, a Kmart spokesman, refused to comment on the company's plans.
But others said the Kmart board, meeting late last night, was putting the
finishing touches on roughly $2 billion in debtor-in-possession financing.
That money will allow it to continue operating while under bankruptcy
protection.
Kmart, which operates roughly 2,100 stores, may use bankruptcy to
extricate itself from leases on about 250 of them around the country,
retail analysts said. A critical question for the retailer is whether
Martha Stewart, its most important and visible supplier, will continue to
supply the stores with her line of housewares. [Page C1.]
A decision yesterday by the Fleming Companies (news/quote), a major food
distributor and grocery wholesaler, to halt shipments to Kmart after the
company failed to make its weekly payment was the final straw. But its
woes had been mounting for some time, with holiday sales at the low end of
what the company had expected and with a longer-term strategy of low
pricing that hurt revenue.
Oddly, the spectacular failure of the Enron Corporation (news/quote),
already the largest corporate bankruptcy ever, may have had as much to do
with Kmart's failure as skittish suppliers and hard-nosed bankers.
Kmart relies on surety bonds, essentially agreements by insurance
companies to continue financing in case of a default, to back its workers'
compensation program and to cover liabilities arising from its sales of
guns and liquor, advisers and executives close to the company said.
Enron depended on such bonds, too, and after it went bankrupt, leaving
insurance companies to cover its liabilities, insurers drastically raised
prices for surety bonds. In Kmart's case, insurers were requiring cash
collateral for the securities.
That placed a large, unanticipated drain on Kmart's cash flow that,
coupled with supplier demands for payment on delivery and the company's
weak performance during the crucial holiday period, drove it to seek court
protection.
"Their cash-flow model for post- Christmas would have been fine — until
Enron scared every last living person in finance out of their wits," one
adviser said.

-- continued --

Even though Kmart drew down a $1.5 billion credit line just after the
holidays, the demands on its cash were too great.
Kmart's inability to pay $78 million to cover its bill to Fleming, one of
its biggest and most loyal suppliers, shows how desperate its position has
become, said Walter F. Loeb, a long-time retail consultant. "They're now
starved for food, so to speak, and that can't go on for more than two or
three days," he said. "They have no money, and it's hard to see what other
choice they have."
Fleming's demand for payment also demonstrates how worried one critical
Kmart distributor has become. Kmart represents 27 percent of Fleming's
sales, and Fleming had committed itself to building three warehouses to
service Kmart. Suppliers hate to alienate such a major customer. "Fleming
probably shipped to Kmart longer than most," said one executive close to
the company.
The two companies are also related through Ronald W. Burkle, an investor
who holds big stakes in both Kmart and Fleming and brokered their
relationship.
Fleming is regarded as a smart operator in the investment community, but
its shares have plummeted as speculation about Kmart's problems have
mounted. "Fleming is working with Kmart as they navigate through their
current financial problems, and we intend to resume delivery of food and
other consumable products to Kmart upon receiving satisfactory assurance
of Kmart's performance," Neal Rider, Fleming's chief financial officer,
said in a statement. "We are also taking the appropriate steps to protect
Fleming's interest."
Kmart has been on the ropes on and off for more than a decade, partly
crushed by ferociously efficient competitors like Wal-Mart (news/quote)
and Target, and partly a victim of its own missteps, like stocking dowdy
fashions and being slow to invest in computer technologies that others,
especially Wal-Mart, have exploited.
In fact, Kmart was near filing for bankruptcy in the mid-1990's, when it
was losing money because its stores were outdated and because acquisitions
of unrelated businesses like Office Max and Borders books had stretched
its resources. Under shareholder pressure, Kmart saved itself then by
spinning off several units, including Borders, the Sports Authority and
other specialty retail units, and replacing its longtime chief executive,
Joseph Antonini.
But to no avail — competitors kept coming. Wal-Mart, which was
overshadowed by Kmart in its 1970's heyday, is now nearly five times
Kmart's size. And Target, regarded as having the most fashionable
merchandise among the discounters, just replaced Kmart as the nation's
second-largest discounter.
Kmart's board has fought hard to avoid a bankruptcy filing in recent
weeks. The company's directors pressed management and its advisers last
week to come up with alternatives to keep Kmart out of the courts, even
though the chief executive, Charles C. Conaway, had argued that bankruptcy
was the company's best option.


-- continued --

Credit rating agencies have been downgrading the retailer's debt. Banks
including J. P. Morgan Chase (news/quote) and FleetBoston (news/quote), as
well as lenders like the GE Capital Corporation, have been negotiating
with the company for the last week about various types of financing.
Kmart has secured the services of Henry S. Miller, the head of Dresdner
Kleinwort Wasserstein's restructuring practice, as its bankruptcy adviser.
Jack Butler, a partner at Skadden, Arps, Slate, Meagher & Flom, who has
represented the company for the last several years, will act as the
company's lawyer.
Investors became increasingly worried about Kmart after the company's
board held a marathon 36- hour meeting spanning Jan. 7 and 8, only to
issue no public statements about the outcome of the meeting for 48 more
hours. When Kmart finally did talk last Thursday, it merely announced a
series of high-level executive changes and said it would review its
liquidity and continue discussions about financing.
James B. Adamson, an outside director with firsthand experience in
managing distressed companies, became Kmart's chairman. And Mark S.
Schwartz, who had been brought in with much fanfare from Wal-Mart to
resuscitate Kmart's fortunes even though he was credited with the failure
of two other retailers, Big V Supermarkets and Hechingers- Builders Square
II, was dismissed as president.
That did little, however, to calm the fears of the company's suppliers and
financiers. Mr. Adamson, who is chairman of the Advantica Restaurant Group
(news/quote), which operates Denny's and other restaurant franchises,
joined Kmart's board in 1996, and although he worked wonders to bring
Revco out of bankruptcy, critics complain that he has not helped Kmart
avoid it.
Mr. Adamson is expected to bring in a colleague who has worked with him at
Advantica as Kmart's chief restructuring officer to work alongside Mr.
Conaway, an adviser said.
While the board shuffled management last week, banks led by J. P. Morgan
Chase worked feverishly to cobble together $2 billion to $3 billion in
asset-backed financing for Kmart.
One investor was told that the bank had offered Kmart two choices. It
could file for court protection to secure that money, or it could stay out
of bankruptcy and take a smaller loan of $750 million to $1.2 billion.
The terms of that loan would have placed J. P. Morgan first in line to
recover not only that money but also the $1.5 billion it was owed after
Kmart drew down its credit line after the holidays. In bankruptcy,
however, J. P. Morgan will have the same standing as bondholders, who are
owed some $4.5 billion, and trade creditors, who are owed $2 billion to $3
billion.
An executive close to the talks said Kmart had hoped to arrange financing
that would keep it out of bankruptcy. "But in a situation like this, you
need to file as quickly as possible so that suppliers start shipping
again," he said.
Kmart's problems have mounted over the last three decades, and a quick fix
is not likely — nor is a strategy for a turnaround clear. Several regional
discounters have either gone out of business or sought court protection at
least twice.

Copyright 2002 The New York Times Company

My only regret is they may survive after closing a few hundred stores!!!  Rosie O'Swine just keeps on giving.  Rushbo even commented on this today - and favorably to gun owners!

My local K-Mart has been very poorly managed for years.  I have long thought it was only a matter of time.  30 miles south of me they built a new store.  4yrs later they built ANOTHER new store - and remained stuck with lease on the old one.  STILL got it some 6 yrs or so later!!  In a town of maybe 10,000 population!  Seems it was a monument to a retiring executive who was from Hillsboro (Ohio).  Loss in the millions.  It is these types of idiotic management decisons that can bring down a big company.

Keep you eye on Big Bear (Penn Traffic) they will go too, just will take a little longer.

Good ridance of bad rubish as my grandma used to say.

Rosie Killed K-Mart.

I went into a Kmart a few years ago, and it took me over 30 minutes to check-out, of course I swore I wouldn't be back, I haven't been back since.

Kmart sucks Ray.  

nail guns ? i'm still worried about those "ASSAULT SHOES"!!!

Rosie ate all their food.

I had forgotten about those stores. Don't forget Coronet's and Roscoe's. That was a long time ago in the 50s & 60s. For me thought the Targets are a lot better than the Walmarts. I ALWAYS have to wait in long lines when I go to my local Wally World, whereas 5 max at the Target.