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Kmart: Rumors of Our Death are Premature

Analysts, downgrading the retailer's stock, have hinted at possible bankruptcy

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Executives at Kmart Corp. (Troy, Mich.) dismissed rumors that bankruptcy might be imminent as the company's stock plunged 13 percent on Wednesday.

“Kmart has sufficient funds and available lines of credit to continue our strategies,” said company spokesman Jack Ferry. “Kmart is implementing a major corporate revitalization strategy that includes massive cultural and operational changes that are already showing results.”

The rumors were touched off by the report of a retail analyst with Prudential Securities (Atlanta) that slashed the retailer's earnings expectations by more than 50 percent for the fourth quarter, recommended that investors sell their Kmart holdings and said bankruptcy might be the best remedy for the discount retailing giant if business doesn't improve soon.

“The next six months represent a critical time for Kmart,” wrote analyst Wayne Hood, in his report, “and we would not be surprised if the company were to file for Chapter 11 bankruptcy if trends do not improve.” He argued such a move would allow Kmart to walk away from expensive leases on unprofitable stores, reduce weekly advertising circulars and restructure its hefty $4.7 billion debt.

The Prudential report followed downgrades from the Moody's and Standard & Poor's debt-rating agencies, which have questioned Kmart's ability to repay its debt.

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Hood said his assessment came after he learned that Kmart's December 2001 sales would not increase by at least 2 percent over last December's, as the retailer had predicted. Hood estimated that figures for December sales, which won't be released until Jan. 10, 2002, could be down 2.5 percent. Referring to possible bankruptcy, he wrote, “We don't believe a Chapter 11 filing is imminent, but we wouldn't rule it out if the first half of 2002 is disappointing.”

Kmart has posted three consecutive quarters of losses for the first time since fiscal year 1995, when it was also dogged by persistent bankruptcy rumors and faltering stock price. Kmart posted a $244 million loss in fiscal 2000 and combined losses of $344 million for the first three quarters of fiscal 2001.

By contrast, early indications show that Wal-Mart (Bentonville, Ark.), Kmart's Number One competitor in discount retailing, will post a 5.5 percent same-store sales gain for December 2001. Even JC Penney (Plano, Texas), a discount retailer with as troubling a recent record as Kmart's, is reportedly expected to show a 5 percent jump for the month.

While Kmart has insisted it has enough cash and credit, analysts tend to agree that problems at the nation's No. 2 discounter run deep. “I don't know if they're at the brink yet, but they continue to bleed,” said Shelly Hale, retail analyst at Banc of America Securities. “I think they need to close a significant number of stores.” Hale said about 25 percent of the 2100 Kmart stores lose money.

Although another analyst, Eric Beder with Ladenburg, Thalmann & Co. (New York), agreed that Kmart must post significant results from its nearly two-year turnaround program this year, he did not think bankruptcy reorganization was in the cards. However, he said he is revising his fourth-quarter and fiscal 2001 earnings estimates. “The fourth quarter is not the story here. What will happen in 2002 is the real story,” said Beder, who has a “buy” rating on Kmart stock. “I think we will see a positive change beginning in the first quarter, and a positive income statement in the third.”

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