NEW YORK — Shares of Kmart Holding Corp. soared 26.6 percent on Monday following the discounter’s forecast of a profit for November and December, even though sales declined in the two months.

This story first appeared in the January 6, 2004 issue of WWD. Subscribe Today.

The retailer said that it expects a “significant profit” for the first two months of its fourth quarter as a result of “strong inventory management and the reduction of unprofitable promotions.”

Shares of Kmart closed at $29.12, up a dramatic $6.12, in trading on the New York Stock Exchange. While below the 52-week high of $34.55 reached Dec. 2, the closing price is nearly two and a half times the 52-week low of $12 that it descended to on May 9, soon after its emergence from bankruptcy and establishment as a new corporation.

The profit forecast came with a disclosure that same-store sales for the November and December months declined 13.5 percent from a year ago. Total sales for the two months fell by 26.1 percent to $5.1 billion from $6.9 billion. One reason for the decline in sales was the closure of 316 stores during the first quarter of fiscal 2003.

Kmart said that income for the two months before interest and taxes is expected to be in excess of $350 million, not including gains on real estate transactions of approximately $75 million. The company said it expects to have income of over $200 million for the fourth quarter’s first two months after interest expense and income taxes. Including gains from the real estate transactions, income is expected in excess of $250 million.

Julian Day, president and chief executive officer, said in a statement, “Kmart’s inventory position has been appropriately managed through the holidays, ending the month of December at a level below $3.5 billion, which reflects a reduction of over 20 percent relative to the prior year on a comparable-store basis. The prudent management of our inventory has not only improved our cash position, but has allowed us to reduce the large markdowns required in prior years and improve profitability.”

Day added that the company is managing the business to restore profitability. “Much of the promotional activity in prior years resulted in generating unprofitable sales,” he explained. “By being more thoughtful in our approach this year, we have improved the profitability of our market basket.”

The retailer said it expects to have in excess of $1.8 billion in cash and cash equivalents and $470 million in long-term debt for fiscal 2003 ending Jan. 28. Long-term debt includes $60 million of 9 percent convertible subordinated notes issued to affiliates of ESL Investments Inc. when the chain emerged from bankruptcy in May. ESL has provided Kmart with the requisite notice to exercise its rights under the terms of the notes to extend their maturity to May 6, 2006, the retailer said.

ESL holds over 52.5 million shares of Kmart, representing a 51.4 percent stake in the retailer, according to documents filed with the Securities and Exchange Commission Monday.

Adding to Kmart’s cash haul is an expectation that by the end of the fourth quarter it will have completed over $100 million in real estate sales from interests that it owns or leases.

The company has been busy cutting costs. On Dec. 1, it voluntarily reduced the size of its credit facility by $500 million to $1.5 billion. Last month, the retailer also executed amendments to its credit facility providing for reduced fees on letters of credit, reduced interest rates on borrowings and a reduction in the unused line fee from 75 basis points to 50 basis points. Kmart said Monday that it has not borrowed under its facility other than for letters of credit since its emergence from bankruptcy on May 6, 2003.

In addition, the retailer is terminating a vendor lien program that has been in place since exiting bankruptcy. Kmart said there was no longer need for it because of the “limited participation in this program, the willingness of suppliers to provide Kmart with market terms and Kmart’s improved financial position.”

While Kmart’s whopping increase helped to boost the Nasdaq 2 percent to 2,047.36, many retailers were left behind Monday during a rally that lifted the Dow Jones Industrial Average 134.22 points, or 1.3 percent, to 10,544.07. The Standard & Poor’s Retail Index rose a comparatively modest 0.4 percent to end the day at 373.78. Two hard-pressed Nasdaq issues, Factory 2-U Stores and Gadzooks, both sustained retreats of nearly 10 percent. Factory 2-U shares dropped 13 cents, or 9.6 percent, to $1.22, while those of Gadzooks were off 14 cents, or 9.5 percent, to $1.33.