KMART STILL PAYS RENT ON 400 EMPTY STORES
Byline: Rich Wilner and David Moin
NEW YORK — In a mammoth and slow-moving cost-cutting effort, Kmart Corp. is trying to dispose of more than 400 stores it’s closed but for which the retailer still pays millions of dollars in rent annually.
Along with remerchandising, restaffing and improving systems and sales, the real estate strategy is critical to Kmart’s turnaround effort. But the discounter said on Friday that it has not yet received bids on 245 of the darkened stores, and that an auction held last November on 188 others produced mixed results. “Some of the deals for those properties have closed, although most are still working their way toward disposition,” a Kmart spokeswoman said. Some of the leases were taken by the landlords; others were sublet or sold. The 188 stores, assigned to LaSalle Partners, a Chicago-based real estate broker, each received at least one bid, the Kmart spokeswoman said. However, she would not say how many of the bids were adequate. Coldwell Banker and some other brokerage firms are also said to be working to dispose sites for Kmart.
Real estate experts said Kmart could be spending more than $182 million a year in rent on the closed stores. In addition, a majority of the sites operate under triple net leases, meaning that Kmart is responsible for taxes and maintenance as well as rent. Therefore, the total cost to the chain is millions more for the closed sites.
Kmart pays about $2 a square foot in rent, 25 to 35 cents in common area maintenance, 10 cents insurance per square foot, and a $1 or more a square foot in taxes, according to estimates from Steven B. Greenberg, president of The Greenberg Group Inc., a real estate adviser to leading retailers.
In many of these locations, Kmart has moved to a larger site but still has the original real estate. In other cases, Wal-Mart or Target has run the Kmart sites out of business.
“The practical way to handle this is to break up the space,” said Greenberg, with the former Kmart stores being carved up by such retailers as Circuit City, Office Depot, Staples, Toys “R” Us, and Sports Authority.
Last year, Kmart closed 207 stores and disposed of 162 properties.
The Troy, Mich.-based discounter said it will probably have to close 70 underperforming units this year, though some Wall Street analysts have said Kmart might need to shut as many as 500 locations, making the task of shedding real estate even more daunting.
“The least expensive way to get rid of all this real estate would be to file Chapter 11,” said Greenberg. “It’s a technique we’ve watched other retailers use in the last year,” he added, citing Merry-Go-Round and Clothestime.
However, Kmart executives have said they have no plans to file Chapter 11. In December, Kmart stock dropped dramatically, and rumors surfaced that the 2,169-store chain might be forced to file Chapter 11 to effect the restructuring. Since then, the retailer has seen its credit rating downgraded to junk-bond status. Around the same time, the retailer reached an agreement in principle with its real estate bondholders to eliminate a put option that would have allowed the holders to demand payment on the bonds when the bonds were downgraded below investment grade.