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Kmart Logs First Profit Since Bankruptcy

14 Jan, 2003 By: Joan Villa

Kmart approved a plan to close 326 stores and emerge from bankruptcy by April 30, after reporting a mixed holiday that produced net profits but declining same-store sales.

For the five weeks ended Jan. 1, Kmart reported net income of $349 million on net sales of $4.71 billion, which were 5.7 percent less than the year-ago period. The decline occurred despite the fact that Thanksgiving Day and weekend sales were included in this season's results but not in the same five-week period for 2001.

Nonetheless, the company said it is forging ahead with plans for a fast-track reorganization. To that end, the retailer has received a commitment for up to $2 billion in exit financing in the form of a revolving credit facility, secured by inventory, from GE Commercial Finance, Fleet Retail Finance Inc. and Bank of America, N.A.

After completing a strategic review aimed at boosting operating and financial performance, Kmart also announced it will close 326 stores and a distribution center, leaving 1,500 locations in the U.S., the Caribbean and Guam. President and COO Julian Day said the retailer will launch an aggressive advertising campaign to protect and strengthen Kmart's competitive position in key strategic markets.

Despite mixed holiday sales, Day said Kmart was “encouraged” by the December results.

“While sales were softer than we had planned, the company clearly benefited from our ongoing efforts to reduce our cost base, increase inventory turns and improve gross margin,” he explained. “In fact, despite significant clearance markdowns associated with our coupon and sale promotions, which were designed to drive store traffic, gross margin as a percent of sales for December 2002 was essentially flat with the same period a year ago."

The company's board of directors also approved in principle a five-year plan of reorganization that it expects to finalize in the coming weeks and file with the U.S. Bankruptcy Court for the Northern District of Illinois Jan. 24.

“The company will emerge from its reorganization cases with a much stronger balance sheet, liquidity position and cost structure,” observed Kmart chairman and CEO James Adamson. “Now that we have accomplished all that we can through the Chapter 11 process, we look forward to putting the considerable costs and distractions of bankruptcy behind us and focusing our full time and attention on revitalizing Kmart."

Kmart expects the store closings to enhance cash flow by $500 million in 2003. The company estimates that aggregate restructuring charges will total $1.7 billion, recorded in the fourth quarter of fiscal 2002 and the remainder in 2003.

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