KMART OPERATING RESULTS, ACTION DRAW PRAISE FROM WALL STREET
NEW YORK — Less than a month ago, there were still rumors of bankruptcy. Now Kmart Corp. is showing signs that it may be close to turning the corner.
The Troy, Mich.-based discounter said Thursday that it posted a bottom-line loss of $420 million in the fourth quarter, but managed to eke out a tiny profit from continuing operations of $21 million, or 5 cents a share.
The small profit in the quarter ended Jan. 31. compares with a loss from continuing operations of $16 million a year ago. It fell in line with Wall Street’s expectations and followed 11 consecutive quarters of declining earnings.
Floyd Hall, chairman, president and chief executive officer, called the quarter “the bottoming out of Kmart’s financial decline.” In his statement, Hall said Kmart “bit the bullet” in 1995 by closing underperforming stores, clearing discontinued inventory and raising cash through the divestiture of non-core assets. He also noted that the company resolved the puttable real estate debt issue that could have caused Kmart to default on its debt, took a one-time writedown on its money-losing Builders Square operation, and “continued to make progress in restructuring and strengthening our financial flexibility and stability.”
Looking to 1996, Hall said “merchandising initiatives already under way will result in improved assortments, better in-stock positions, cleaner and more orderly stores, and dramatic gains in customer service. We are confident that our 1995 actions, our new management team and an intense customer focus will produce a return to profitability in 1996 and longer term.”
Analysts said their conference call with Kmart Thursday was very upbeat.
“The outlook is relatively positive,” said George Strachan, at Goldman Sachs, noting the progress Kmart has made in driving sales and cutting costs while raising cash through the sale of non-core assets.
“The challenge for Kmart,” said Strachan. “is to not only continue to drive sales, but get the mix right so they can improve margins.”
Wayne Hood, at Prudential Securities, said the most important challenge for Kmart was getting the puttable bond issue behind them. However, analysts said Kmart would like to find additional financing to give it greater financial flexibility and clean up its balance sheet, to further relax the creditors and the factoring community.
It has filed a shelf registration for a the sale of a total of $1.2 billion in debt and equity securities, and observers expect the discounter will try to raise $750 million to $1 billion through the sale of convertible preferred stock. Kmart said that if it is unable to gain additional financing, its interest costs will rise $70 million a year.
Hood said if the company is able to complete the preferred stock offering and stabilize the erosion in profitability “they can move on” with their overhaul. “Kmart will be around. The only question is whether they will be operating under the umbrellas of the courts,” Hood said.
Several factors said that they had no plans in changing the level of support they are now providing Kmart.
In interviews following the Kmart conference call with factors and Wall Street analysts, one factor said he was “not panicking” over the size of Kmart’s net loss and that overall, the results “were not bad.”
Kmart executives had warned credit executives that results for the fourth quarter would be off as the discounter tried to clear old merchandise and reposition stores. Factors had reacted by laying as much as 40 percent of the risk on vendors and charging some of their smaller clients a fee to factor Kmart orders.
A second factor said Kmart executives seemed to have made the right moves to build sales and are putting in place a strategy to return to profitability on a net basis. The factor said Kmart seems to have straightened out its financial picture for at least several months as it works to restructure its bank credit lines.
Kmart recently announced that it had won an extension of its bank facilities until February 1997 while it attempts to rework those deals. Walter Loeb, at Loeb Associates, was impressed that Kmart’s focus is on making its business more profitable in its existing space.
Kmart said it plans to increase sales per square feet to at least $200 in 1996 from $190 in 1995 and has a longer-term goal of $240 to $250 a foot.
“It’s a very focused approach, and I think the strategy is going to work,” Loeb said. “They’re much more bottom-line oriented than growth oriented and will have major earnings improvement in 1996.”
Loeb is expecting a profit of 50 cents a share.
Robert F. Buchanan, at NatWest Securities, on Thursday changed his 1996 estimate to a one-cent profit from a 76-cent loss, prompted by fourth-quarter results and general improvement in the look of the stores.
“Kmart stores, which have been absolutely miserable places to be in, much less to shop in, for many years, are now showing signs of improvement,” Buchanan said.
He said many of Kmart’s problems resulted from its prior managements’ mistakes, and new management has already improved in-stock positions on health and beauty aids, tidied up the stores and improved customer service. Sales in the fourth quarter rose 6.6 percent to $10.5 billion from $10 billion. Same-store sales gained 4.7 percent on a consolidated basis, with U.S. Kmart stores ahead 5.9 percent.
The steep bottom-line loss in the quarter was after pretax writeoffs of $532 million, or $390 million after tax.
Of the $532 million accounting writeoff, $370 million related to Builders Square; $114 million was for its Canadian operation, and $48 million was for closed stores.
In addition, the latest quarter includes a $51 million charge for the previously announced restructuring of its real estate and bank debt.
The net loss compares with net income of $145 million, or 31 cents a share, in the fourth quarter of 1994.
Gross margins in the quarter improved to 20.4 percent of sales from 20.3 percent, helped by a previously announced inventory accounting change made in the first quarter of 1995. Selling, general and administrative expenses were trimmed to 20.2 percent of sales from 20.8 percent.
Excluding the accounting charges, operating profits more than doubled in the quarter to $105 million from $41 million. The gain was driven by Kmart’s U.S. stores’ increase in operating profits to $124 million from $29 million. International operations showed a loss of $7 million and Builders Square lost $12 million.
In the year, U.S. Kmart’s operating earnings slumped 48.1 percent, excluding charges, to $262 million from $505 million. International and Builders Square each logged a loss of $17 million, causing overall operating profits in 1995 to plunge 59 percent to $228 million. For the full year, the net loss was $571 million against income of $296 million, or 63 cents a share. Before the accounting writeoff, the loss in 1995 was $100 million.
Sales in the year gained 5.8 percent to $34.4 billion from $32.5 billion. Same-store sales advanced 5.6 percent at U.S. Kmart stores, and 4.3 percent overall.
Kmart told analysts it does not plan to close more than 50 stores in 1996, of which 15 closures have already been announced. It plans to open 24 Kmart stores and 11 supercenters
Kmart operates 2,168 Kmart stores, 167 Builders Square units and 147 stores outside the U.S.