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Kmart Latest Plunge: Third-Quarter Losses Balloon to $383M

NEW YORK — Kmart Corp.’s picture is getting gloomier by the quarter.<br><br>The bankrupt discounter’s loss more than doubled in the three months ended Oct. 30 from the year-ago period, and the company said the critical holiday sales...

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NEW YORK — Kmart Corp.’s picture is getting gloomier by the quarter.

This story first appeared in the December 24, 2002 issue of WWD.  Subscribe Today.

The bankrupt discounter’s loss more than doubled in the three months ended Oct. 30 from the year-ago period, and the company said the critical holiday sales outlook remains murky.

For the quarter, the Troy, Mich.-based retailer reported a net loss of $383 million, or 76 cents a diluted share. That compares with last year’s loss of $152 million or 31 cents.

Excluding noncomparable items, discontinued operations and reorganization costs, the third-quarter loss was an even greater $390 million, or 78 cents.

The results reflect the restatement of the 26-week period ended July 31, as well periods in prior fiscal years. As reported, on Dec. 9, Kmart said it would be restating financial results for the last three-and-a-half years to reflect certain adjustments deemed necessary as a result of the firm’s audit of its accounting practices and procedures.

On Dec. 16, Kmart filed a request with the Securities and Exchange Commission to extend the filing date of its quarterly report for the 13 and 39 weeks ended Oct. 30 to provide additional time for the company to complete its financial statements and management’s discussion and analysis of operations.

Sales for the period plunged 16.1 percent to $6.73 billion from $8.02 billion a year ago, as same-store sales fell 7.6 percent. The sales decline was primarily because of the company’s closing of 283 under-performing stores during the second quarter.

Monthly sales in October also dropped, declining 3.9 percent over year-ago levels.

“Our reorganization team is [working to finalize] a comprehensive business plan, analyzing our store base and taking other actions necessary to fulfill our goal of filing a proposed plan of reorganization with the court and emerging from Chapter 11 court protection as early as practicable in 2003,” said chief executive officer James Adamson in a statement. Kmart has said it hopes to come out of bankruptcy in July.

In its monthly operating report for the four weeks ended Nov. 27, the beleaguered retailer reported a net loss of $40 million on net sales of $2.47 billion. Comparable-store sales also took a beating because of unfavorable comparisons, receding 17.2 percent versus last year. In contrast to many other stores, the company’s fiscal period ends on the last Wednesday of the month. As such, Kmart’s reporting period for November does not include Thanksgiving weekend sales, which caused the unfavorable comparison.

Since December sales will include sales results from Thanksgiving weekend, Kmart expects those sales to benefit from the inclusion, but those results might be adversely affected by the shortened holiday shopping season, the firm said.

“The company’s performance over Thanksgiving weekend was encouraging,” said chief operating officer Julian Day in a statement. “The post-Thanksgiving period also started strong, but sales in the last two weeks have been softer than we had anticipated.”

Other key third-quarter financial indicators were also not positive. While selling, general and administrative costs were $233 million lower than last year, as a percentage of sales, they grew 70 basis points to 22.5 percent from 21.8 percent. Moreover, gross margin declined 320 basis points to 17 percent of sales from 20.2 percent a year ago. Kmart said the margin decline was primarily because of an increase in promotional markdowns, more clearance markdowns and lower vendor allowances, partially offset by better margins from the scaling back of the BlueLight Always program.

“The lack of good, quality deals with their vendors is going to continue to hurt operating profit and gross margin,” said Richard Hastings, chief economist at Cyber Business Credit. “That is going to continue to be a problem and they need to deal with it. I think they have a slightly better than 50-50 chance of exiting from bankruptcy on plan, but they are very vulnerable to macroeconomic shocks. With the geopolitical situation being so uncertain, it is just too soon to tell.”

None of Kmart’s restated financials should impact its liquidity or add to its obligations requiring a future use of cash, the firm said in a statement.

Kmart pointed out that the peak borrowing period for its seasonal inventory buildup has passed and it has now repaid all its outstanding debtor-in-possession borrowings. As of last Thursday, the company had no borrowings outstanding and had utilized $326 million of its DIP credit facility for letters of credit. Its total DIP availability as of that date was $1.57 billion.

Some of the adjustments were identified as out-of-period adjustments during the preparation of the firm’s third-quarter report to the SEC, while others were previously described in Kmart’s second-quarter report. It was the combined heft of the new and previously disclosed adjustments and their material impact on 2002 results that prompted the restatements.

On an aggregate basis, the adjustments are expected to pile on less than $100 million in additional losses for the three proceeding years. Net losses for the three-year period were previously said to be approximately $2 billion.

Additionally, the firm said it anticipates recording an adjustment to its 1999 fiscal year, opening retained earnings balance to reflect adjustments attributable to fiscal years 1998 and earlier.

Kmart said it would also adjust previously reported financial results for miscellaneous immaterial items that were identified, and which had been recorded in the ordinary course of business. These items will be shifted to the appropriate fiscal periods.

One of the adjustments that came to light related to an understatement of historical accruals for certain leases with varying rent payments and a related understatement of historical rent expense, said the firm. Another adjustment just disclosed stemmed from a software programming error in Kmart’s accounts payable system. The error resulted in some paid invoices awaiting a store report of delivery not being appropriately treated in the company’s financial statements.

Shortly after Kmart’s Jan. 22 bankruptcy filing, it launched an internal investigation into its stewardship under previous management, prompted by an anonymous letter from employees, which was also sent to the SEC.

In its annual report filed in May, Kmart said it was cooperating with the SEC and the U.S. attorney’s office in Detroit.

The Federal Bureau of Investigation also joined in, and the SEC and the U.S. attorney’s office are still investigating matters of accounting and corporate stewardship.

Overall, for the first nine months of the fiscal year, Kmart reported a net loss of $2.12 billion, or $4.21 a diluted share. That compares with last year’s restated loss of $796 million, or $1.62. The net loss from continuing operations was an even greater $2.16 billion.

Excluding noncomparable items, reorganization items and discontinued operations, the company recorded a more moderate net loss of $1.06 billion, or $2.10, versus a year-ago loss of $611 million, or $1.24.

Sales for the period waned 13.4 percent to $21.89 billion from $25.27 billion, and same-store sales dropped 10.2 percent versus a year ago.

Also on Monday, Kmart filed its quarterly report with the SEC and in it reported that in light of returns in the equity markets, the company currently expects that it will likely be required to commence making contributions to its defined benefits pension plan in 2005. Kmart’s pension plan was frozen in January 1996.

Kmart shares, which were delisted from the New York Stock Exchange last week, ticked up fractionally at 30 cents on the Pink Sheets electronic system.

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