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Kmart Goes Bankrupt

A year ago, the question was "to file or not to file." Now, 11 months after Kmart Corp.’s Chapter 11 filing made it the largest U.S. retail bankruptcy ever, the question for the Troy, Mich.-based discounter is "to be or not to be," and...

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A year ago, the question was “to file or not to file.” Now, 11 months after Kmart Corp.’s Chapter 11 filing made it the largest U.S. retail bankruptcy ever, the question for the Troy, Mich.-based discounter is “to be or not to be,” and there’s no answer yet.

Executives at the nation’s third-largest retailer have been adamant about filing a plan of reorganization by late February, with an exit from bankruptcy proceedings sometime in July.

During a year when executive shenanigans were major news stories and corporate governance became the new buzz phrase on Wall Street, Kmart certainly had its share of headlines.

Shortly after its bankruptcy filing on Jan. 22, the company, reacting to an anonymous letter from employees that was also sent to the Securities and Exchange Commission, launched an internal investigation on its stewardship under previous management.

In its annual report, or Form 10-K, filed with the SEC in May, the bankrupt retailer said it was cooperating with the SEC and the U.S. attorney’s office in Detroit. The Federal Bureau of Investigation also jumped in, and the SEC and the U.S. attorney’s office are still investigating matters of accounting and corporate stewardship. Investigators, sources said, continue to investigate compensation and loan deals inked by former chairman and chief executive Chuck Conaway and former president Mark Schwartz. More than 20 subpoenas reportedly have been issued to potential witnesses so far.

According to SEC filings, Conaway received more than $22 million in compensation during his 22-month tenure at Kmart. Schwartz pulled in $10.8 million over 16 months. Both also received retention loans from the bankrupt chain, $5 million for Conaway and $3 million for Schwartz. Also under investigation are loans made to 26 other current and former employees under Conaway’s reign.

As investigators probed, the company reported a $2.42 billion loss for 2001, about $8.42 for every man, woman and child in the U.S. and nearly 10 times the prior-year’s already ample flow of red ink. Even without nonrecurring items, the 2001 loss was $987 million. Sales in 2001 also dropped 2.4 percent to $36.15 billion from $37.03 billion, with same-store sales essentially flat as it dipped 0.1 percent. A shift towards lower-margin food products, inability to establish efficient management information systems and even a $150 million reduction in vendor allowances also helped make its Chapter 11 filing inevitable. Darkening the outlook further was Kmart’s acknowledgement that it would restate 2001 quarterly financial statements to correct improper recognition of a vendor transaction, “which more appropriately should have been deferred and recognized over the life of the contract.”

James Adamson, the Kmart director who became chairman just before the bankruptcy filing, became ceo in March as the firm announced it would shutter 283 stores. In all, more than 22,000 jobs have been lost at Kmart since the company filed for Chapter 11.

Kmart hasn’t been alone among retailers adding to the unemployment rolls. Kmart’s reorganization has so far cost about as many jobs as the liquidation of Ames Department Stores, announced on Aug. 14. Bankrupt Ames, which was in its second tour of bankruptcy proceedings, had been planning on a coming-out party this year. On July 25, a Detroit bankruptcy court pulled the plug on 134-year-old Jacobson Stores Inc., which was given its walking papers because the upscale retail chain, one of several hard-pressed regional department stores, couldn’t find a buyer. More than 500 jobs were lost in the Jacobson bankruptcy. While its future has yet to be decided, Pennsylvania Fashions, operators of 247 stores in outlet malls, in February filed for bankruptcy court protection in Trenton to give it some breathing room to restructure operations.

It’s highly unlikely that Kmart’s closures, or those of other retailers, are finished. Kmart has acknowledged that it will close more stores after the upcoming holiday season, but has kept mum over the quantity and timing. Reportedly, there are close to 600 stores that could be affected — a number that Kmart executives dispute but retail analysts say is necessary to give the discounter a better chance for survival.

Executives at the broken chain insist it’s on the mend. A major source of hope is a store prototype unveiled at its White Lake Township store in a Detroit suburb in October. The updated look includes a new lime green logo and in-store signage and the highlighting of its proprietary vendor partnerships with Martha Stewart and, more recently, Joe Boxer. While Stewart has long been considered the chain’s premium brand, the domestics diva has had her own headaches over insider-trading issues. Still, her brand generates $1.5 billion of Kmart’s annual revenues and a new holiday line was unveiled before Thanksgiving.

New for 2003 will be the Thalia collection, a partnership with the Latin singing sensation that underscores Kmart’s increased focus on the Hispanic community.

While the planning continues, so do the losses: $377 million for the second quarter alone. Sales fell 15.7 percent, to $7.52 billion, and same-store sales dropped 11 percent during the three months. Third-quarter results were not available at press time. Equally anticipated was any substantiation of reports that Carrefour or another firm might make an attempt to buy the chain.

Will Kmart, the purveyors of the Blue Light special that fell into the red, find life easier being green? All eyes are on how its holiday sales results shape up. A company spokesman has said repeatedly that even poor holiday sales wouldn’t “break” Kmart.

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