Kmart Bankruptcy May Come Tuesday After Food Supplier Halts Shipments

DALLAS – Kmart slipped a step closer toward bankruptcy after the troubled discount retailer failed to make its regular weekly payment to its primary food distributor.

The New York Times and Wall Street Journal, citing unnamed sources, both reported that Kmart would seek bankruptcy protection as early as Tuesday. The company's board was reportedly meeting late Monday to discuss the filing.

Kmart officials could not be reached.

Some analysts said Fleming Cos.' decision to cut off shipments to Kmart was the final blow. Fleming said it is owed $78 million by Kmart.

"The company is fast approaching the end of its available options — either to file for bankruptcy or extend its financing. Something has to happen very fast," said Kurt Barnard, president of Barnard's Retail Trend Report, based in Montclair, N.J.

Other suppliers have delayed or stopped shipments to Kmart in recent days, but the Fleming situation poses perhaps the biggest crisis yet, because grocery offerings often drive traffic.

"It's one thing if you don't have T-shirts or lawn products. You can live without the deliveries for a week or so, but you can't sell yesterday's wilted lettuce," said Barnard.

Charles Conaway, Kmart's chief executive, said in a statement Monday that the company was hopeful business would resume with Fleming "once we work through these financial issues."

Kmart, based in Troy, Mich., has been on a downward spiral since announcing on Jan. 10 that it did no better than break even for fiscal 2001 because of disappointing holiday sales, and said that it was in discussions with its lenders about its financing.

Ratings agencies downgraded Kmart's credit, its stock plunged and the company was removed from Standard & Poor's benchmark index of 500 leading stocks. Speculation has run rampant about a bankruptcy filing, but company officials have declined to comment.

Last Thursday, Kmart removed its president and named turnaround specialist James B. Adamson as its new chairman, replacing Conaway, who remains as chief executive. The management changes were in an effort to gain confidence of lenders, suppliers and investors.

But Kmart's continued silence about its financing plans is increasingly angering suppliers.

A Kmart bankruptcy could be especially damaging to the Martha Stewart brand, which is sold exclusively at the store and is the company's largest volume-producing line in generating $1.5 billion in sales last year.

Stewart told Newsweek in an article in its upcoming Jan. 28 issue that Kmart's troubles pose problems for her brand.

Fleming said it has stopped all shipments except some perishable food that was already en route to Kmart stores and Super Kmarts. Just a week ago, Fleming said its relationship with Kmart was strong, with receivables running up to $70 million.

"We were conducting business as usual until it was clear [last week] that they wouldn't be making a payment," said Fleming spokesman Shane Boyd.

Fleming, the nation's second-largest wholesale food distributor behind Supervalu, has been Kmart's exclusive distributor for food and other consumable products since February 2001, winning a deal valued at $4.5 billion.

Kmart began as a modest five-and-dime store in downtown Detroit more than a century ago and by the 1980s was a staple in thousands of cities across the country.

Wal-Mart surpassed the company in the early 1990s, and Kmart was at the brink of extinction in the mid-1990s, when the company suffered heavy losses, closed stores and laid off employees.

The retailer brought in Conaway in May 2000 to restructure the ailing company, which has seen its sales slip at the hands of top retailers Wal-Mart and Target Corp.