Attention, Kmart Shoppers . . .

Kmart Corp. (Troy, Mich.), the nation's third-largest discount retailer, filed for Chapter 11 bankruptcy protection today. The $36 billion-a-year, 2100-store organization with $17 billion in assets is the largest retailer ever to declare bankruptcy in the U.S.

Kmart made the filing in U.S. Bankruptcy Court for the Northern District of Illinois in Chicago. The company said that it will reorganize on a fast-track basis and hopes to emerge from Chapter 11 in 2003. It insisted that it would keep its 2114 Kmart stores open.

“We are determined to complete our reorganization as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future,” ceo Charles Conaway said in a statement.

The retailer announced it had secured a $2 billion senior debtor-in-possession financing facility from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and J.P. Morgan Chase Bank.

The filing comes a day after a major food distributor, Fleming Cos. (Dallas), said it had cut off most shipments to Kmart because the retailer failed to make its regular weekly payment for deliveries. Fleming said Kmart, its largest customer, owes $78 million. Earlier in the week, The Scotts Co. (Marysville, Ohio) — a global leader in the consumer lawn and garden industry — decided to delay shipments until more information was known about the retailer's future.

The state of the Kmart-Martha Stewart relationship is still not known. Rumors had circulated that Martha Stewart would pull out of their exclusive merchandise agreement, which has produced more than $1 billion a year in sales. A Chapter 11 filing would make it legally possible for Martha Stewart Living Omnimedia (New York) to extricate itself from the contract. As of today, though, Martha Stewart products are expected to remain on Kmart shelves as lawyers debate the wording of the deal.

“I think a bankruptcy judge would have a lot of leeway in how to interpret that contract,” said Sharon Patrick, president and coo of Martha Stewart Living Omnimedia. Stewart is a Kmart director, and her contract with Kmart extends through 2008. The other board members may have been depending on Stewart to remain affiliated with Kmart as a way to make bankruptcy reorganization work.

In recent months, there have been reports that Kmart shoppers are unhappy with the way Martha Stewart products are displayed in stores — difficult to locate the frequently out of stock.

Kmart's failure, following the colossal downfall of Enron Corp. (Houston) earlier this year, is not entirely coincidental. Kmart had been living on insurance companies'surety bonds, and after the Enron bankruptcy insurers began raising prices for those bonds and asking for cash collateral. It put a large and unanticipated drain on Kmart's cash flow.

The former S.S. Kresge Co. (begun in 1899, in Detroit), which opened its first Kmart store in 1962 in Garden City, Mich., grew to a 2000-store chain by 1981 and was for a time the leading, most successful discount mass merchant in the country. But Wal-Mart (Bentonville, Ark.), which also opened its first store in 1962, passed Kmart in sales by 1990, kicking off a decade of frustration for the former kingpin. During the 1990s, while many other retail organizations thrived, Kmart was forced to sell off a number of subsidiary properties (Office Max, Builders Square, Walden Books, Borders Books, Sports Authority), close nearly 300 stores and undergo some wrenching top-management changes.

Last week, the most recent management change saw Charles Conaway removed as chairman (though he remains as ceo); the board taken over by outside director James Adamson; and Mark Schwartz fired as president. Conaway had joined the company in 2000, promising to improve earnings and inventory within two years.