Troubled discount retailer Kmart ended days of speculation Tuesday and filed for Chapter 11 bankruptcy protection after the company failed to make its regular weekly payment to its primary food distributor.
Kmart, based in Troy, Mich., has been struggling to compete with Wal-Mart Stores and Target and had major credit rating agencies cut their ratings for its debt in recent weeks.
The filing was made in U.S. Bankruptcy Court for the Northern District of Illinois in Chicago. The company said that it will reorganize on a fast-track basis and hopes to emerge from Chapter 11 in 2003.
"We are determined to complete our reorganization as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future,'' Kmart CEO Chuck Conaway said in a statement.
Kmart has about 275,000 employees and its stores in all 50 states, Puerto Rico, U.S. Virgin Islands and Guam.
Kmart's bankruptcy declaration is the largest in the retail business since Federated Department Stores Inc. filed for Chapter 11 in 1990 and emerged two years later.
Rumors of a bankruptcy had been prevalent in recent days.
On Tuesday, 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.
On the New York Stock Exchange, Kmart stock dropped 60 percent Tuesday, or $1.04, to close at 70 cents. Its stock had traded as high as $13.55 last summer.
Some analysts said Fleming's decision to cut off shipments to Kmart was the final blow.
Fleming, the nation's second-largest wholesale food distributor, has been Kmart's exclusive distributor for food and other consumable products since February 2001, winning a deal valued at $4.5 billion. Fleming said it is owed $78 million by Kmart.
"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 Kurt Barnard, president of Barnard's Retail Trend Report, based in Montclair, N.J.
Kmart 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.
A Kmart bankruptcy will 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 has a provision in her contract that allows her to exit Kmart in case of bankruptcy, but such a move has to be approved by a bankruptcy judge. Martha Stewart officials did not return calls for comment.
Stewart told Newsweek in an article in its upcoming Jan. 28 issue that Kmart's troubles pose problems for her brand.
Kmart said in a release it had secured a $2 billion senior secured debtor-in-possession financing facility from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and J.P. Morgan Chase Bank.
Since Conaway became Kmart's CEO in May 2000, he has closed unproductive stores, reintroduced the BlueLight Special, and made other changes to help the discount retailer become more productive and more efficient.
The BlueLight Special marketing tool, first introduced in 1965 and retired in the 1990s, offers customers lowered everyday prices on more than 30,000 items.
Despite its current woes, Kmart has seen improvements since it was at the brink of death in the mid-1990s, when the company suffered heavy losses, closed stores and laid off employees.
Analyst Michael Bernacchi, a professor of marketing at the University of Detroit Mercy, said Kmart suffers because it isn't seen as deep a discounter as Wal-Mart, and it doesn't have the upscale touch that the Minneapolis-based Target conveys.
In 1977, the S.S. Kresge Co. — founded in 1899 by Sebastian S. Kresge — changed its name to Kmart Corp. to reflect that in 1976, sales at Kmart stores accounted for 94.5 percent of the company's domestic consolidated sales. The first Kmart discount store was founded in 1962.
By the 1980s Kmart 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.
Reuters and the Associated Press contributed to this report.