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Studios Face ‘Tough Choice' With Kmart

1 Feb, 2002 By: Joan Villa

Suppliers resumed shipments to Kmart last week amid assurances that the bankrupt discounter would be able to pay for product received during reorganization.

Studios are cautious, however, facing a "tough choice" on how to handle new shipments when many are already owed millions of dollars for fourth quarter product, according to one major studio executive who asked not to be identified.

"We are really looking at it and trying to get comfortable with it, and all the studios are hoping they can get comfortable with it because we all want Kmart to stay in business," he said. Kmart intends to emerge from bankruptcy in 2003, and the video executive said studios are optimistic that creditors and the court will "find a way" to make that happen.

"I haven't heard of anyone who's not shipping them," noted a secondary supplier who also did not want to be named. Discussions now are focusing on devising payment terms for fourth quarter product, he said.

"In a case like Kmart, you don't want to be on the outside if and when they become healthy," he explained. "You want to continue doing business with them with the assumption they'll get back on their feet. And if they do, you'll be one of the companies that's supported them in their time of trouble, but obviously managing what you're doing so if anything negative happens you don't get caught in a bind."

According to Video Store Magazine market research, Kmart represents a 7 percent market share in video sales and is the number two video sellthrough retailer in the country behind Wal-Mart.

Analyst Shelly Hale of Banc of America Securities said she was told Kmart is receiving shipments from most suppliers, and that suppliers were guaranteed payment. Whether Kmart will emphasize or eliminate some product categories in the wake of weak holiday sales will not be decided for several weeks, she added.

However, she said the retailer added more DVD units in the fall and has begun to participate in the category's growth, making it unlikely that the chain would pare down its video departments. A Kmart spokesman confirmed the 2,114-store merchant experienced double-digit video sales growth in 2001 over the previous year, largely due to DVD.

"I would think management would see DVD's target audience as being very appealing — and the growth in the industry — [and] they would continue to be committed to the category," Hale noted.

Although Kmart insists suppliers are shipping, video inventory at store locations still appears spotty. One Big K store, for example, had no copies of the Disney animated hit Atlantis the day after its release Jan. 29, although the title had been prominently featured in that week's advertising circulars. Warner Home Video's Rock Star was displayed from the previous week, but there were no copies of two new titles, Warner's MVP 2: Most Valuable Primate or DreamWorks Home Entertainment's Curse of the Jade Scorpion, which both streeted Jan. 29.

Music distributor Handleman Co. and its subsidiary Anchor Bay Entertainment reported it was shipping to Kmart "under terms and conditions that were in place prior" to the bankruptcy filing. Handleman is owed some $60 million and is designated a "critical vendor" to Kmart, while video supplier Anchor Bay, owed $3.5 million, will submit a claim as an unsecured creditor, according to Anchor Bay.

"We are pleased with the progress that has been made by Kmart" in its first week of reorganization, said Handleman's chairman and CEO Stephen Strome. "We are working closely with Kmart to continue promoting music product, which has been increasing steadily over the past several years in all of their stores. Handleman Co. supports Kmart's efforts to return to profitability and will work with the Kmart team to help them accomplish its objectives.''

Kmart reported "significant progress" in the reorganization, including approval for a $2 billion debtor-in-possession credit facility that would allow payment of employee wages and benefits, and assurances from key vendors that they would resume shipments under "normal terms." CEO Charles Conaway noted "overwhelming support" of customers, vendors and employees following the chain's Chapter 11 bankruptcy filing Jan. 22.

He praised the "prompt approval by the court of our ‘first day motions,' which, taken together, will enable the company to operate without interruption and meet normal business obligations."

Conaway reportedly argued in favor of payments to food supplier Fleming Companies, Handleman and newspapers that run Kmart ads at a hearing last week in U.S. Bankruptcy Court for the Northern District of Illinois, and the judge ruled that such terms were necessary to keep the business as a going concern.

Despite the bankruptcy, Kmart reportedly will launch a new ad campaign in mid-February that introduces a new tagline: "Kmart. For real life." The company is expected to scrap its previous pitch, "Blue light always."

Jessica Wolf contributed to this report.

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