By  on March 10, 2005

NEW YORK — Despite posting a hefty fourth-quarter profit, management at Kmart Holding Corp. said Wednesday that more work needs to be done on the operations and “shopping experience” fronts.

For the three months ended Jan. 26, income rose 14.4 percent to $309 million, or $3.09 a diluted share, from $270 million, or $2.78, in the same year-ago quarter. Excluding gains on the sales of assets and bankruptcy-related recoveries, adjusted earnings came in at $259 million, or $2.59, versus $215 million, or $2.23, a year ago. The company exited from bankruptcy in 2003.

Sales declined 6.6 percent in the quarter to $5.91 billion from $6.33 billion in the same period last year, while same-store sales fell by 4.5 percent, which compares with a 13.5 comps decline in the year-ago quarter.

Alwyn Lewis, president and chief executive officer, said in a statement, “While we are pleased with our performance, our return to solid, profitable operations is only the first stage in our effort to revitalize this organization. We look forward to what still needs to be accomplished and plan to continue our momentum by further improving our operations and the customer shopping experience in 2005.”

Kmart’s cash balance at yearend stood at $3.4 billion, exceeding prior expectations of $3.2 billion, and is an increase of $1.3 billion over the prior year. The discounter said investing activities in fiscal 2004 generated $332 million, mostly from proceeds of $444 million from the sale of owned and leased properties to Sears and Home Depot.

Richard Hastings, an independent research analyst, wrote in a research note that Kmart management in the quarter “emphasized buying cost reductions over sales volume, so their gross profit margin would rise while they stayed tough on expenses.”

For the full-year period, net income came in at $1.11 billion, or $11 a diluted share, on sales of $19.7 billion. By comparison, the company posted income of $234 million, or $2.51, in fiscal 2003, which was for the 39 weeks after it exited bankruptcy, on sales of $17.07 billion. For the 13 weeks ended April 30, 2003, when the predecessor firm was still under bankruptcy court supervision, the loss was $862 million, or $1.65, on sales of $6.18 billion.Last November, Kmart said it was acquiring Sears, Roebuck & Co. in an $11 billion deal. The new entity will be known as Sears Holdings Corp. Shareholders of each retailer are expected to separately cast their ballots for or against the proposed merger on March 24.

Sears said on Wednesday that Institutional Shareholder Services, an independent proxy advisory firm, has recommended that Sears’ shareholders vote “for” the merger with Kmart.

According to Sears, ISS in its March 8, 2005, report said, “Based on our review of the terms of the transaction...in particular the reasonable premium received, the reasonable synergy assumptions, the positive market reaction and the improved governance profile, we believe that the merger agreement warrants shareholder support.”

Separately, Kmart said in a filing with the Securities and Exchange Commission, that its merger with Sears, will enable Sears Holdings “to accelerate its off-mall growth through the conversion of approximately 400 Kmart stores to Sears’ nameplates over the next three years.”

“The stores to be converted will most likely be locations that feature customer demographics that are more similar to those of a typical Sears shopper,” the company said in the filing. “[Sears] Holdings also intends to evaluate opportunities to cross merchandise its Kmart and Sears stores with a wealth of well-known proprietary and national hardline, home and apparel brands.”

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