NEW YORK — Kmart’s slimmed-down version of itself is paying off, but retail observers said the discount chain still has more work to do to trim the fat and its losses.
Kmart Holding Corp. last week dramatically scaled back its second-quarter loss from a year ago, helped by deep cost cutting, marking the discount retailer’s first reported results since it emerged from Chapter 11 bankruptcy protection in May.
The Troy, Mich.-based discount chain said it lost $5 million, or 6 cents a diluted share, in the second quarter ended July 30, compared with a loss of $293 million, or 58 cents a share, in the same period last year. Last year’s results include a $14 million charge related to store-closing liquidation sales.
Sales for the quarter fell 21.3 percent to $5.65 billion and on a same-store sales basis, sales decreased 5.4 percent. The retailer closed 599 stores during fiscal 2002 and the first quarter of 2003 as part of its bankruptcy reorganization.
“We are pleased with the progress we continue to make in our business,” Julian C. Day, president and chief executive officer, said in a statement. “We are focused on profitable sales, reduced SG&A and enhancing the productivity of our assets. As a result, our liquidity position remains strong.”
In an 8K filing with the Securities and Exchange Commission, the retailer also said its board approved the repurchase of up to $10 million of the company’s outstanding stock for the purpose of providing restricted stock grants to certain employees. The repurchase was subject to an amendment to the credit agreement of its exit-financing facility.
As of July 30, Kmart had about $1.2 billion in cash and cash equivalents, and borrowing availability of about $1.5 billion on a $2 billion credit facility.
“In light of its favorable liquidity position, the company is exploring various alternatives to reduce the cost of its exit-financing facility,” the company said.
Kmart is banking on a slew of exclusive brands, such as Joe Boxer and Thalía, to help in its broader bid for corporate longevity through proprietary lifestyle collections, as well as to help differentiate it from competitors like Wal-Mart and Target.Retail consultant Walter Loeb of Loeb & Associates said Kmart’s financial reversal of fortune came as a positive surprise, but he warned that the company still needs to slim down further before it can show a profit. He also said Kmart’s heavily promoted exclusivity of some brands will help it to better compete with Wal-Mart and Target, but its stores still need to be in stock and well merchandised, which he said isn’t true in all its stores.
“Until the company makes money, I am not satisfied,” Loeb said. “It may be necessary to close additional stores in order to achieve profits.”
In January 2002, Kmart became the largest U.S. retailer ever to declare bankruptcy. The retailer exited bankruptcy on May 6, with about 600 fewer stores, 37,000 fewer employees and new financial backers.
Gross margin as a percentage of sales increased 410 basis points to 21.8 percent from 17.7 percent, reflecting a decrease in shrinkage and an improvement in its sales mix, the company said. In addition, the gross margin rate was positively affected by the termination of its supply arrangements with Fleming and lower expenses.
Selling, general and administrative expenses, which includes advertising costs, as a percentage of sales increased 30 basis points to 21.7 percent from 21.4 percent, reflecting store closures, as well as a decrease in payroll and other related expenses from corporate headquarter cost-reduction initiatives and lower depreciation expense due to adjustments to the book value of its property and equipment.
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