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NEW YORK — Now comes the hard part for Kmart Corp.
Late Tuesday night, the Chicago bankruptcy court finally confirmed the retailer’s reorganization plan, paving the way for a May 5 emergence from Chapter 11 after resolving more than 180 objections from creditors.
This story first appeared in the April 24, 2003 issue of WWD. Subscribe Today.
Julian Day, Kmart’s president and chief executive officer, said in a statement, “The actions we have taken to restructure Kmart will continue at a rapid pace. Upon emergence, we will be able to put an even greater focus on strengthening the company’s operational and financial performance.”
For many Kmart observers, time may be the retailer’s worst enemy — not to mention the historic inability of bankrupt retailers to return to solvency and vitality.
Richard Hastings, chief economist for Bernard Sands, a credit reporting service, said, “After emerging from one of the most aggressive and audacious bankruptcy turnarounds ever achieved on this scale, Kmart competes with a wide range of retailers with powerful spending budgets and rock-solid market positions. Walgreen’s, Costco, CVS, Family Dollar, Dollar General, Big Lots, Kroger, Kohl’s, Target Stores and Old Navy each represent competitive issues for Kmart going forward.
“Kmart now competes against time to instantly fix up problems created by more than 15 years of mismanagement.”
However, Bernard Sands’ vice president and director of credit, Bob Carbonell, indicated the firm was “approving all client orders for Kmart.”
According to at least one credit source, “Kmart probably has at least a three-month grace period where they will have to show some positive results or [certain financial institutions] are going to give them grief over Christmas.”
One factoring firm, which has previously approved substantial orders, will wait for the “smoke to clear.” An executive at the firm said, “We’re just not sure we have a survivor here. The major suppliers are Sony, Timex, Sunbeam and all the branded merchandise carried in the store. Most of those firms are not factored. We are waiting to see how much independent risk these suppliers are willing to take and whether they are willing to ship at prebankruptcy levels even with the closure of 600 stores. If not, how will Kmart get its shelves stocked?”
The factor said he doesn’t want to put his clients at risk in case Kmart has a tough time surviving outside of Chapter 11. “As you know, if factors don’t like what they see right before shipment, they can pull the plug prior to delivery. Their clients better have a second home for those goods in case factors do pull the plug. We just won’t do that to our clients because its not fair to them.”
Another retail source said that how well Kmart does during the back-to-school sales season will affect Kmart buyers’ abilities to purchase gray goods for shipment during late fall and holiday.
Of course, Kmart comes out of bankruptcy as a $25 billion a year retailer that still has enormous clout with vendors. Kmart is still the largest account of numerous vendors. Many of them are on pins and needles. How Kmart fares will determine their own financial health and longevity.
A midsize apparel vendor observed, “We used to have an account at Kmart and decided to exit that business fairly early in the bankruptcy. We just didn’t want to take that risk anymore. My company still does business with Wal-Mart and with other department stores. But even after Kmart exits bankruptcy, I know my company is not going to try to do business with them again.”
Hastings noted, “Trade vendor relations will remain an issue for years to come, and at the first sign of trouble, trade vendors will respond with a challenging level of anxiety. Kmart’s survival does not require perfection, but it does require a continuation of the same sense of urgency, discipline and purpose that helped them turn around their bankruptcy so quickly.”
Others aren’t so sure Kmart has done enough.
James Harris of the investment banking firm Seneca Financial Group, who worked on the restructuring of Federated Department Stores during its bankruptcy tour, said, “My own view is that Kmart really hasn’t reorganized. It closed some stores, got some cash and reduced some of its debt load. In terms of what it needs to do, such as refocus its store base and fine-tune who its targeted customer should be, the company just hasn’t done any of that. Even its merchandise is still more expensive than some of its competitors. Why would consumers want to pay a premium at Kmart?
“My own guess is that we’ll see how the company does next Christmas. If trends don’t improve, Kmart won’t be around next year. I think the sad fact is that the company is either going to be sold as a group of stores or it will go out of business,” he said.
James Welty, chairman of Clear Thinking Group, which has extensive experience working on retail turnarounds, observed, “Kmart’s chances for survival will be dependent on the retailer’s ability to get a good merchant in there. They haven’t named anyone yet so that tells you something about their ability to attract a good candidate.”
ESL Investments Inc., headed by Edward Lampert, chairman and ceo, will be Kmart’s biggest shareholder when the company comes out of Chapter 11. His firm will hold four spots on Kmart’s board. Sources in the marketplace said Lampert is making a real estate play, holding the cards on the very good retail locations should Kmart have to liquidate.
Harris noted, “I can tell you that betting on retailers in a turnaround situation — and I am one of those who have made investments that didn’t work out — is not an easy thing. Many of the retailers who have gone in and come out don’t survive, such as Ames, Bradlees and Montgomery Ward. I think it is very hard for a retailer to go through this jarring process and come out unless they have fixed core operating issues, such as real estate, merchandise and supply-chain management.”
Lampert said in a statement, “Kmart will emerge a stronger company, with a healthy balance sheet, a store-centric philosophy and the right leadership to revitalize this organization. Going forward, Kmart will have a corporate governance structure that will allow the company to focus on the creation of long-term value.”
A spokesman for Kmart pointed out that the firm’s sales dropped to $30.76 billion from $36.15 billion during fiscal 2002, and same-store sales declined 10.1 percent. “So, for the year we were in Chapter 11,” he noted, “we had $30 billion in sales and lost only 10 percent of our customer base.”
Some sales lost in 2002 also were due to store closures, of which Kmart has either concluded or planned about 600 during its bankruptcy stay.
According to the spokesman, management knows that a lot of work remains, but felt that it could be better accomplished outside of Chapter 11. “We won’t have between $10 million to $12 million a month to pay in professional fees.” Kmart, according to bankruptcy industry estimates, spent about $120 million on professional fees during 2002.
The spokesman also hinted that a chief merchant might be announced by May 5. “Julian Day has said that he wants his management team in place by the effective date of the [reorganization] plan,” he noted.