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Red Lights Flashing: Kmart Net Hits $93M, But Hazards Lie Ahead

Despite a steep decline in same-store and total sales, investors keyed in on Kmart’s second consecutive profitable quarter to boost its stock.

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Julian Day

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Martha Stewart

Photo By WWD Staff

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Photo By WWD Staff

NEW YORK — When it comes to Kmart, earnings are better than sales — at least to Wall Street.

Well, that’s true for now before gas prices head toward $3 per gallon and potentially keep strapped shoppers out of Kmart — and perhaps Wal-Mart, Target and other stores, too.

Despite a steep decline in same-store and total sales, investors keyed in on Kmart Holding Corp.’s second consecutive quarter of profits. Shares of the discount retailer jumped 9.8 percent from the prior close to end Monday at $48.62 in Nasdaq trading, while the S&P Retail Index fell 1.2 percent and the Dow Jones Industrial Average plunged 105.96 points, or 1.1 percent.

Kmart delivered earnings of $93 million, or 94 cents a diluted share, for the three months ended April 28 compared with a loss of $862 million, or $1.63, in the same year-ago quarter. Sales dropped 25.3 percent to $4.6 billion from $6.2 billion, while same-store sales fell 12.9 percent.

Kmart said in its quarterly report that the declines in same-store and total-store sales were due to fewer midweek circulars compared with a year ago, as well as the closure of 316 stores during last year’s first quarter.

Adding to Kmart’s profitability, the company said in its Securities and Exchange Commission filing, was a more favorable gross margin rate. While gross margin decreased by $282 million to $1.14 billion from last year’s $1.42 billion, it rose to 24.6 percent as a percentage of sales versus 23 percent a year ago. Boosting the gross margin rate, the filing said there “were fewer clearance markdowns and reduced depreciation as a result of the write-off of long-lived assets in conjunction with the application of fresh-start accounting.”

Julian Day, president and chief executive officer, said in a statement that the company has been focused on “profitable sales with an improved gross margin rate, reducing operating costs through operational execution and working to improve the productivity of our assets.”

He added the retailer ended the quarter with $3.4 billion in inventories, a reduction of more than 23 percent from last year.

As reported, the Seventh Circuit Court of Appeals in Chicago in February decided that the bankrupt Kmart should not have paid $367 million to certain former key suppliers, which could have ranged from apparel firms to trash contractors, for pre-petition obligations. The SEC filing said Kmart recognized $7 million in recoveries during the quarter from vendors that received cash payments from the bankrupt entity. What is still unclear is who gets the cash, the new reorganized Kmart or the bankrupt entity for distribution to creditors.
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