Kmart: We're Coming Out!

Kmart Corp. (Troy, Mich.) has filed its proposed Plan of Reorganization with the U.S. Bankruptcy Court in Illinois. The huge discount mass-merchandiser, which filed for bankruptcy protection in January 2002, expects to emerge as early as April 30, 2003.

According to the plan, Kmart would end up operating 1513 stores in 572 markets. (At the time of its declaration, its organization consisted of 2114 stores.) The plan calls for a substantial investment by two plan investors — ESL Investments Inc. and Third Avenue Value Fund — in furtherance of Kmart's financial and operational restructuring. Under the terms of the agreement, these and others will invest at least $140 million in exchange for shares of stock in the reorganized Kmart. Their prerogatives, whenever the company emerges from bankruptcy, will include naming a fresh set of directors to sit on the company's board.

Kmart had secured $2 billion in exit financing earlier this month, the day before it announced it would close 326 more stores. That consortium was led by GE Capital and included Fleet Retail Finance, Fleet Securities and the Bank of America.

“With the filing of our Disclosure Statement and Plan of Reorganization, Kmart is moving ever closer to concluding our reorganization and emerging from Chapter 11 in a stronger and more financially stable position,” said Kmart president and ceo Julian Day. “The Chapter 11 reorganization process is allowing us to achieve many important goals, including the elimination of hundreds of underperforming stores, the rejection of costly leases, and the restructuring of our balance sheet through the conversion of substantially all debt into equity. We are intensely focused on emerging from our reorganization cases this April because we firmly believe that the further operational improvement we need to implement will be best achieved outside of Chapter 11.”

The five-year business plan projects a transition year in fiscal 2003 and a return to profitability in fiscal 2004. “Our business plan is based on our expectation that we will continue to implement several key operational initiatives,” said Day, “including our focus on being 'the store of the neighborhood' and further testing of the 'store of the future' prototype, with the goal of achieving significant improvements in the customer experience. We intend to continue to eliminate underperforming SKUs and reallocate shelf space to more profitable items. Our marketing activities will continue to emphasize our roots as a high/low retailer and the popular exclusive brands like Joe Boxer, Martha Stewart Everyday and Thalia available only at Kmart.”

While contracts with some Kmart suppliers and vendors will be affected by the new plan, a spokesman for Martha Stewart Living Omnimedia (New York) said its agreement was not altered by the change in control. Kmart sold about $1.5 billion worth of Martha Stewart Everyday merchandise last year.