Kmart Set for Bankruptcy Exit, but Tougher Problems Loom

Kmart is one step closer to starting the next chapter of its corporate life, as a bankruptcy court has OK’d its reorganization plan. Here’s...

"My own guess is that we’ll see how the company does next Christmas. If trends don’t improve, Kmart won’t be around next year. I think the sad fact is that the company is either going to be sold as a group of stores or it will go out of business," he said.

James Welty, chairman of Clear Thinking Group, which has extensive experience working on retail turnarounds, observed, "Kmart’s chances for survival will be dependent on the retailer’s ability to get a good merchant in there. They haven’t named anyone yet so that tells you something about their ability to attract a good candidate."

ESL Investments Inc., headed by Edward Lampert, chairman and ceo, will be Kmart’s biggest shareholder when the company comes out of Chapter 11. His firm will hold four spots on Kmart’s board. Sources in the marketplace said Lampert is making a real estate play, holding the cards on the very good retail locations should Kmart have to liquidate.

Harris noted, "I can tell you that betting on retailers in a turnaround situation — and I am one of those who have made investments that didn’t work out — is not an easy thing. Many of the retailers who have gone in and come out don’t survive, such as Ames, Bradlees and Montgomery Ward. I think it is very hard for a retailer to go through this jarring process and come out unless they have fixed core operating issues, such as real estate, merchandise and supply-chain management."

Lampert said in a statement, "Kmart will emerge a stronger company, with a healthy balance sheet, a store-centric philosophy and the right leadership to revitalize this organization. Going forward, Kmart will have a corporate governance structure that will allow the company to focus on the creation of long-term value."

A spokesman for Kmart pointed out that the firm’s sales dropped to $30.76 billion from $36.15 billion during fiscal 2002, and same-store sales declined 10.1 percent. "So, for the year we were in Chapter 11," he noted, "we had $30 billion in sales and lost only 10 percent of our customer base."

Some sales lost in 2002 also were due to store closures, of which Kmart has either concluded or planned about 600 during its bankruptcy stay.
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