NEW YORK — Even with bad news pouring out of its Troy, Mich. headquarters, Kmart’s chances of emerging from bankruptcy soon remain strong. The view on long-term survival, however, remains bleak.

The man ministering most to the bankrupt chain, James Adamson, quit as chief executive on Sunday, just five days after the chain announced it would close 326 more stores and slash 37,000 jobs, and ironically just five days before the company is expected to make a major filing pertaining to its reorganization plan. A five-year business plan was approved by the board last week.

Adamson, a longtime Kmart board member and ceo since March 2002, had predicted Kmart would quickly come out of Chapter 11, this spring in fact, and the chances of that look good, considering Kmart last week secured $2 billion in exit financing from a lending group led by GE Commercial Finance and said it was on "a fast track" to exit Chapter 11 by April 30.

Now it will be up to Adamson’s successor, Julian Day, a former Sears executive who has been serving for the past year as Kmart’s president and chief operating officer, to get the chain through the court process and on track.

While Adamson’s sudden departure Sunday raises speculation about whether his outlook on the business had changed, it’s possible he had personal reasons for taking himself out of the front role. On Friday, the company demanded back $28 million in loans made to senior executives during the tenure of Adamson’s predecessor, Chuck Conaway. Five executives who took loans were dismissed and Conaway is reportedly under investigation.

During the issuance of loans, Adamson was a board member. He was also on the committee that appointed Conaway ceo. Questions are being raised about whether the board was aware of, or approved of the loans and had sufficient information from the recipients. While many corporations do make loans to senior executives, in Kmart’s case, the loans seemed surprising, considering the firm’s financial difficulties. The five executives who received loansare: Janet Kelley, executive vice president, general counsel and assistant secretary; Mariana Keros, vice president, trend and product development; Douglas Meissner, president, Western division; Paula Paquette, senior vice president, hardlines and home, and Lee Viliborghi, regional vice president. The company said the board’s audit committee had developed "credible and persuasive evidence" that the loan program was established without proper disclosure to Kmart’s board.Neither Adamson, who continues as non-executive chairman — the title he held previously — nor Day were available for comment Monday.

In a statement Sunday, however,Adamson said, "My principal focus when I accepted the ceo role two months into the company’s Chapter 11 reorganization was to lead Kmart through a fast-track reorganization in order to position it to execute its longer-term business plan outside of Chapter 11 as quickly as possible. My first two decisions as ceo were to enhance the credibility of the finance team and to reach out to a qualified outsider to join Kmart as president and chief operating officer."

On Monday, industry sources noted that Kmart will most likely come out of bankruptcy as a healthier company, with a leaner infrastructure and store base, having eliminated 59,000 jobs and 609 weak stores since its bankruptcy filing in January 2002. For the five weeks ended Jan.1, Kmart posted its first profit since going bankrupt, reportingincome of $349 million on sales $4.71 billion.

They also noted that Kmart will continue as an important force in the market, with about 1,500 stores and volume at around $25 billion, and with many remaining stores well-situated in urban locations catering to minority and low-income customers, with some distance from prime competitors. Kmart’s recent marketing has been more tailored to minority populations, including inserts published in Spanish.

Another plus: Day’s background is in retail. He was formerly executive vice president and chief operating officer at Sears, Roebuck, before joining Kmart, and his experience at Sears, another turnaround situation, could prove valuable. "Adamson is a turnaround specialist, but his skills may not be transferable to every bankruptcy situation," said Elaine Hughes, president of executive search firm E.A. Hughes & Co. "This is a good move to put Day in charge. He understands the retail business turnaround model." Adamson’s turnaround experience included Denny’s and Burger King.

Bob Carbonell, at Sands Credit, said, "Those who run the day-to-day operations are the retail guys, which Day has been in charge of for the last 10 months. I don’t see the change as a negative, even though the company isn’t out of Chapter 11 yet. We have no concerns on the change for ceo. As for the company, the plan will be filed in the next week or so."Retail consultant Walter Loebwas surprised by Adamson’s decision to step down before the company comes out of bankruptcy. But he suggested Adamson’s departure was not really part of Kmart’s housecleaning. If it was, then it’s likely Adamson would have been required to step down as chairman as well, Loeb said.

No matter who is in charge, the post-bankruptcy period will be challenging, requiring significantly improved performance. GE will keep Kmart on a tight leash, imposing stringent payment requirements and covenants with a lot of collateralizing on the real estate and inventory, and high interest. "It won’t be an easy load for Kmart to carry," said one financial source.

According to Arnold Aronson, managing director of retail strategies for Kurt Salmon Associates, "Beyond coming out of bankruptcy, and getting rid of unprofitable stores and resizing the infrastructure, the greatest challenge is to develop a compelling business strategy that makes Kmart attractive to shoppers, versus major competitors." Aside from some new marketing and a handful of prototype stores, Kmart has yet to reveal a broad vision for long-term survival, but there could be some insight into its future contained in the upcoming filing.

Team building will be required, particularly with a new ceo on board and considering the chain has been operating without a chief merchant or general counsel. According to one source, Adamson tried to bring back several merchants who had been dismissed by Conaway because they felt his strategy, which on some levels meant going head-on against Wal-Mart, was wrong. Roger Goddu, former ceo of Ward’s, was reportedly contacted for the post of chief merchant, but he wanted to be ceo and declined the offer.

As Kmart downsizes, Wal-Mart and Target will be among the winners grabbing market share. For the real estate community, the downsizing is a mixed blessing. While they now know which stores will close, it won’t be easy to find replacement tenants.

As Matthew Ostrower, a real estate investment trust analyst at Morgan Stanley, wrote in a research note: "We regard the announcement as neutral to slightly positive for the shopping center REIT group, mainly because it will result in an orderly further reduction of Kmart exposure." However, "Given Kmart’s bankruptcy and ongoing weak sales, we remain concerned about the company’s viability and believe the threat of an eventual total liquidation remains." Ostrower also said Kmart might extract rent-reductions from landlords, hurting them further. Kimco Realty, for example, said 12 of the 47 Kmarts in its portfolio would close and that five-year rent reductions on six locations, reducing average rents to $5.50 a square foot from about $8, were granted.Another REIT, New Plan Excel, said in a release that Kmart will close six of the 35 stores on New Plan locations, and six sites are getting rent reductions. The average rents were $3.83 a square foot.

As for the implications of Kmart’s store closures, Salomon Smith Barney equity analyst Deborah Weinswig wrote in a research note last week that while Wal-Mart is expected to benefit the most from the Kmart closings, the earnings impact could be greater for Target because of its smaller store base. She estimated a positive 9 cent EPS impact for Target, based on a market share gain of 20 percent. The impact for Wal-Mart is projected to be a 4 cent-EPS gain, assuming a market share increase of 55 percent.

Weinswig also said Kmart’s decision to shutter 60 SuperK formats, leaving just 52 from the peak of 124, "is essentially a concession by management that they will never be able to effectively compete with Wal-Mart’s Supercenters."

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