Beleaguered discounter Kmart Corp. , known for its "blue light" special, needs to figure out a way to keep the lights on.

If Kmart collapsed, the fallout would be huge. The company, which recently filed for bankruptcy protection, has nearly $40 billion in annual sales, employs about 250,000 and has 2,100 stores. A total loss would mean thousands of unemployed workers, empty storefronts around the country and empty-handed vendors.

That's why experts believe Kmart executives, employees, vendors and restructuring experts will do everything they can to stave off liquidation -- Kmart is simply too big to fail. Some bankers think Kmart could survive through a buyout that replaces its current management.

"Kmart can live on if there's a M&A deal. If they come out of Chapter 11 and try to use the same management and strategies they'll end up like Montgomery Ward," one banker said, referring to the one-time No.2 retailer that operated for years under bankruptcy protection before winding down two years ago.

Kmart, which Wednesday faces its second hearing in bankruptcy court, is working on a plan to revamp and revitalize itself. The odds are not in its favor. Losers litter the retail landscape: Caldor, Bradlees, Lechters and Service Merchandise all filed for Chapter 11 and folded.

"Restructuring is the last option you'd want to take if you're a retailer. It helps the company in short term but it doesn't provide a solution," said Jeff Wissman, a vice president with consultants Retail Forward. "It gives you a little leeway to do things you could not do outside of bankruptcy, like getting out of leases, getting a fresh start. But it will not solve any problems a retailer has regarding strategy."

MERGERS RARE

Mergers in the retail business are unusual. It's a risky industry complicated by with capital demands for store building and inventories, mercurial fashion trends and price-conscious consumers. Retailing is highly competitive and margins of profitability are thin, leaving little leeway for mistakes. Usually the most valuable assets are long-term leases.

Still, some say a foreign behemoth like Dutch supermarkets group Ahold or U.S. grocery distributor Fleming Cos Inc. might give Kmart the leverage it needs to compete against Wal-Mart.

A Kmart spokesman declined comment on merger speculation.

And vendors, who are consistently squeezed by Wal-Mart on pricing, have an interest in keeping Kmart afloat and may be more forgiving with debt paybacks and shipping merchandise.

"The vendors want to keep it alive," a restructuring expert said. "If Kmart disappeared, vendors would be devastated, they don't want to be controlled by one major retailer."

Closing unprofitable stores will also make the company leaner and give it a fighting chance.

"It's going to be tough but an honest challenge. The question is, can we shed enough unprofitable stores in sufficient numbers rapidly enough and get costs down to the standards set by Wal-Mart?" said David Dykhouse, partner in Patterson, Belknap, Webb & Tyler LLP, which who represents several large suppliers to Kmart.

RESTRUCTURING

Kmart's bankruptcy is the largest in retail history, since Federated Department Stores Inc. filed in January 1990. Kmart has listed total assets of $17 billion at book value and total liabilities of $11.3 billion as of Oct. 31, 2001.

Although Federated, which operates Macy's and Bloomingdale's stores, is seen as a Chapter 11 success story, most bankruptcy experts say Federated's filing was done as a result of a leveraged buyout that left the company under a heavy burden of interest and principal payments.

Kmart's Chapter 11 filing does take some pressure off the ailing firm and allows it to shed unprofitable leases and work out more favorable -- and realistic -- loan repayment plans.

The company expects to complete a review of its stores' performance for presentation to a bankruptcy judge on March 20, and set July 2003 as a target date to emerge from bankruptcy, a goal analysts characterized as very ambitious.

But Kmart executives aren't working alone. The firm enlisted a top-shelf team to lead it through restructuring, hiring Henry Miller, the head of Dresdner Kleinwort Wasserstein's restructuring practice, as its bankruptcy advisor. Jack Butler, a partner at Skadden, Arps, Slate, Meagher & Flom, who has worked with Kmart for many years, will represent the company. Butler has advised Enron, Comdisco and Xerox.

Part of Kmart's strategy is to position itself as "the authority for what Moms' value," by offering exclusive brands to differentiate it from competitors. Indeed, one of the few things that has worked for Kmart is its licensing agreement with Martha Stewart Living Omnimedia to sell the domestic goddess' namesake brand of home goods.

"They need to figure out a viable strategy and it won't be something just to do with marketing, they'll have to change their operations," said Daniel Raff, associate professor of management at the Wharton School. "This is a very big company and just getting the infrastructure in place will be huge -- they need to get the right sheet music to everyone and make sure they know how to read their parts."