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NEW YORK — The bill for Kmart Corp.’s second, and perhaps final, round of post-bankruptcy reductions is in: 326 stores, 37,000 jobs and $1.7 billion.

That’s the latest from the bankrupt retailer about how many stores it will shutter as it proceeds, with exit financing in hand, speedily on a fast track to exit bankruptcy proceedings by April 30.

This story first appeared in the January 15, 2003 issue of WWD. Subscribe Today.

While some estimates of future closures ran as low as 250, Kmart’s announcement on Tuesday confirms a story that first ran in WWD Monday specifying the number of stores to be closed as “closer to 325.” The company, which filed the largest Chapter 11 bankruptcy in retail history 51 weeks ago, said in the fall that it would likely close stores, but didn’t provide guidance on how many sites would be affected. Retail and real estate circles speculated that the affected store base would range from a low of 250 to as high as 600 sites. Kmart began notifying associates of its decision on Tuesday.

It wasn’t all bad news from Kmart, however. The Troy, Mich.-based discounter reported monthly results that were in the black for the first time since it filed Chapter 11 in a Chicago court last January. For the five weeks ended Jan. 1, Kmart posted income of $349 million on sales of $4.71 billion, a period that included sales from Thanksgiving Day and the holiday weekend. Comparable-store sales — for locations open at least a year — decreased 5.7 percent in the period.

James Adamson, chairman and chief executive officer, credited the Joe Boxer apparel brand, the new licensing agreement with Mexican singer Thalia and Kmart’s new store prototype as contributing to the improved results. There was no mention of Martha Stewart’s home merchandise in Kmart’s announcement.

Al Koch, chief financial officer, said during a conference call Tuesday that Kmart executives were “very encouraged by the company’s performance in light of what has been a very challenging environment nationwide and a weak retail environment.”

The closures affect 266 Kmart and Big Kmart stores and 60 Kmart SuperCenters in 44 states and Puerto Rico, as well as a distribution center in Texas.

Following the closures, Kmart would operate a total store base count of 1,500 sites throughout the U.S., the Caribbean and Guam with a focus on being a “high-low” retailer. Fourteen stores in New York will be closed, including one in Queens and one in Brooklyn. Two in Manhattan, on 34th Street and at Astor Place, will remain open. The Astor Place site was on the list of possible sites to be closed that had been circulated among real estate circles late last year.

Kmart said that the net proceeds from the store closing sales is expected to be $500 million in cash flow to the company for 2003. Related restructuring charges are expected to aggregate to $1.7 billion, with the bulk to be recorded in the current fourth quarter of fiscal 2002.

According to company executives, there will be no more store closures between now and the anticipated Chapter 11 exit date of April 30.

The company expects to receive Chicago bankruptcy court approval on Jan. 28 to close the stores. Inventory clearance sales at the affected locations would begin almost immediately. The distribution center is slated for closure in March.

The discounter has already lined up $2 billion in exit financing from GE Commercial Finance, Fleet Retail Finance and Bank of America. The credit facility, secured by inventory, would replace the retailer’s current debtor-in-possession financing line on the effective date of the reorganization plan. Bankruptcy court approval is still needed for the plan of reorganization that it will file by Jan. 24.

Jim Rice, vice president for Sands Credit Services, observed: “A lot of people were still skeptical about Kmart coming out of Chapter 11. Now that we know Kmart has a firm commitment for exit financing, I think this gives the discounter more credence that it will exit bankruptcy.”

Part of the court filing is an additional document known in bankruptcy terms as the disclosure statement, in which the retailer includes information such as its five-year business plan, one that Kmart said was approved by its board on Monday. Bankruptcy court approval of the statement on Feb. 25 will enable Kmart to begin the process of soliciting acceptances of its plan from its creditors. If delays — such as creditors negotiating over the terms of their distributions — and other glitches can be avoided, Kmart is hoping to be out of Chapter 11 by April 30, the end of its first quarter as well as that of most other large retailers.

Adamson said during the call Tuesday afternoon, “We do not want to remain in bankruptcy a day longer than necessary.”

He added that the closures are “painful” because the actions affect thousands of loyal workers.”

Adamson said in a statement, “The developments we are announcing today mark an important milestone in Kmart’s reorganization. When we filed our Chapter 11 cases last January, the company anticipated that it would complete the actions required to be taken during its reorganization and emerge from Chapter 11 protection by the second quarter of 2003. Now that the company has largely completed its Chapter 11 agenda, successfully obtained a commitment for exit financing and is in final negotiations with our stakeholders regarding the terms of what we believe should be a consensual plan of reorganization, we expect to meet — or even surpass — our original goal.”

Kmart’s reorganization plan does not provide for any cash distribution to creditors. Under the proposals being hammered out by it statutory committees, unsecured pre-petition creditors will exchange their claims for common stock in the reorganized Kmart on a pro rata basis. Trade vendors under certain circumstances would have the benefit for up to two years of a first lien on “substantially all owned real estate that is developed and unencumbered.” They also get a “subordination provision” under the contemplated reorganization plan regarding future proceeds of leasehold interests.

As is typically the case with bankruptcy proceedings, existing holders of Kmart common stock will get nothing and current shares will be extinguished.

According to Kmart, the plan of reorganization would include a provision for the creation of a creditors’ trust to pursue all legal actions arising out of its stewardship review. Beneficiaries of the trust will be Kmart’s creditors and possibly holders of trust-preferred securities and common stock.

The combination of store closures, job cuts, exit financing and a profitable month appeared to instantly generate optimism in financial circles about Kmart’s ability to survive.

Richard Hastings, credit economist for Cyber Business Credit, observed: “Kmart’s chances of emerging from bankruptcy have instantly jumped from 50 to 75 percent. It is coming at a time when vendors are ready to jump at any good news they can get their hands on. The store-closing plan will help it to stabilize profitability going forward so that December’s results will be the start of a better trend with its best stores in operation.”

The economist said that Kmart had an improved December due to the “better mix of merchandise categories. Soft lines have better margins. The gross margins were 17 percent at the end of the third quarter in October and now are above 19 percent.”

One apparel vendor selling to department stores and mass merchandisers, upon hearing the news of the store closures, was glad that Kmart would stay open, even though several hundred doors would shutter.

“Retail doors have been dropping like flies. Between the bankruptcies, some liquidations and store closures, it was beginning to look like maybe we wouldn’t have many more doors to sell to. Our accounts include names such as Stein Mart and Mervyn’s, but there’s not tremendous volume. The business is really centered on the production for orders from the mass discounters,” the executive said.

As reported, Kmart’s lawyers questioned former president and chief operating officer Mark Schwartz earlier this month as part of the company’s stewardship review. Former chairman and chief executive officer Charles Conaway was questioned last year, and is expected to be contacted for a follow-up session later this month.

Chief restructuring officer Ron Hutchison said during the telephone conference that the disclosure statement would include information detailing the company’s stewardship review, which he said is “substantially completed.”

Meanwhile, Kmart will provide transition assistance for affected associates, including severance, extended benefits and job placement assistance. Julian Day, president and chief operating officer, said during the conference call that associates are being encouraged to apply for re-employment at nearby Kmart stores.

Day said Kmart will embark on a marketing campaign to let customers know that Kmart remains “open for business.”

Kmart also filed its amended annual report for 2001, or Form 10-K, with the Securities and Exchange Commission, as well as an amended quarterly report, or Form 10-Q, for the first two quarters for fiscal 2002. The restated filings reflect adjustments to correct past accounting practices.

The net impact of the restatements was to reduce reported operating results by $28 million in fiscal 2001, $24 million in fiscal 2000 and $39 million in fiscal 1999. The restatement also had the effect of reducing the retained earnings on the company balance sheet on Jan. 30, 1999, by $138 million.

Adamson said in a statement: “We have made considerable progress over the past year in attacking many of the systemic problems that have plagued Kmart’s performance for a long time. Clearly we continue to face many challenges — both within our organization and in a difficult economic environment that has not been kind to many retailers.

“We are encouraged by our successes, such as the Joe Boxer brand introduction, the favorable reaction to our new store prototype and our new brand licensing agreement with Thalia. We are confident that we will continue to build momentum and make demonstrable gains in the years ahead,” he stated.

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