DETROIT – When Sebastian S. Kresge opened his first store here in 1899, he sold everything for 5 and 10 cents, a marketing strategy that caught on and helped turn his company into a multibillion-dollar discount chain of more than 2,100 stores.
Analysts say it's that kind of vision that Kmart Corp. - named so in 1977 because Kmarts were Kresge's most successful stores - needs to bring itself back.
Tuesday, Kmart filed for Chapter 11 bankruptcy and became the largest retailer to seek court protection from creditors. Kmart filed for protection because of several factors, including lower-than-expected holiday sales and earnings performance in the fourth quarter. Fourth quarter earnings are to be released next week.
The No. 3 discount retailer known for the BlueLight Special and Martha Stewart fashions has struggled against No. 1 Wal-Mart Stores Inc. and No. 2 Target Corp.
What Kmart needs, retail analysts say, is a plan.
Conor Reilly, senior partner with Gibson, Dunn and Crutcher, said Kmart needs to ascertain ``what their sort of retailing rationale is, what's going to bring customers to them as opposed to other competitors.''
``They have let things get in such a downward spiral,'' he said.
As part of its reorganization, Troy-based Kmart said it will evaluate the performance of every store and terms of every lease by the end of the first quarter of 2002, and will close unprofitable or underperforming stores. Some analysts said Kmart would close up to 700 of its stores.
Kmart has about 275,000 employees and stores in all 50 states, Puerto Rico, the U.S. Virgin Islands and Guam.
Kmart, which filed its petition in U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, said it had secured $2 billion in financing from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and J.P. Morgan Chase Bank. The financing, approved late Tuesday by Bankruptcy Court Judge Susan Pierson Sonderby, will help the company's cash flow while it restructures.
It has targeted emergence 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,'' CEO Chuck Conaway said in a statement.
Kmart also named Ronald B. Hutchison executive vice president and chief restructuring officer. Hutchison, 51, was most recently chief financial officer of Advantica Restaurant Group Inc., where he and new Kmart Chairman James B. Adamson were instrumental in the company's successful reorganization.
Also part of Kmart's reorganization plan:
-Seeking bankruptcy court approval to terminate the leases of about 350 stores that were closed previously or are currently being leased by other tenants, for an immediate annual savings of about $250 million.
-Pursuing opportunities to reduce annual expenses by an additional $350 million through reengineering the organization, staff reductions, office consolidations, and other actions.
-Investing in key merchandising and marketing initiatives by offering exclusive brands that will differentiate Kmart from its competitors.
Among the exclusive products Kmart has is the Martha Stewart Everyday brand, which covers such products as sheets, towels, paints and kitchenware. It is Kmart's largest volume-producing label, generating about $1.5 billion in sales last year.
Martha Stewart Living Omnimedia has a provision in its contract that allows Stewart to leave Kmart in bankruptcy, but it would have to be approved by a bankruptcy judge. Martha Stewart said in a statement that Kmart would continue to sell the brand ``for the foreseeable future.''
While Kmart figures out its business strategy, Kmart customers might find somewhere else to shop, said Emme Kozloff with Bernstein Sanford. Filing for bankruptcy means the shelves aren't going to be fully stocked the next day, something the company already struggles with, she said.
``You're going to frustrate customers, and they're going to go, and it's going to be hard to get them back,'' Kozloff said.
For Kmart's suppliers, the bankruptcy filing was a bit of a relief.
Kmart on Monday failed to make a regular weekly payment to its primary food distributor. Fleming Cos. cut off shipments to Kmart, saying it was owed $78 million. But on Tuesday, Fleming said it intends to resume deliveries to Kmart ``upon receiving satisfactory assurances from Kmart, via the bankruptcy court.''
``First and foremost, the Kmart filing helps define the path forward in our relationship,'' said Mark Hansen, chairman of the board and chief executive officer of Fleming.
At the hearing in Chicago, Conaway took the witness stand as the company fought for permission to keep paying a few critical suppliers.
He said shutting off payments to Fleming ``would be devastating'' to Kmart and make it harder to reverse the company's fortunes. The same would be true of music supplier Handleman Co. and newspapers in which Kmart's ads appear, Conaway said.
Sonderby ruled that those payments were ``necessary to keep the business as a going concern.''
Other suppliers have delayed or stopped shipments to Kmart in recent days. But bankruptcy expert Martin Zohn with Proskauer Rose LLP said vendors will come back.
``The Chapter 11 brings order to the process. ... It has straightforward rules and for some reason people find that reassuring,'' Zohn said.
``The one thing Chapter 11 can't solve is the quality of actual merchandise and sales.''
Kmart has long struggled to compete with lower-priced Wal-Mart and higher quality Target but took a sharper dive after Jan. 1, when debt rating agencies, including Standard & Poor's, lowered their credit ratings for Kmart, and the company was removed from S&P's benchmark index of 500 leading stocks. Moody's Investors Service, the other major credit ratings service, lowered Kmart's debt two notches.
Kmart listed its assets in its bankruptcy filing at $16.3 billion, with $10.3 billion in total debts, making it the largest retailer to declare bankruptcy. Previously, Federated Department Stores Inc., with $9.1 billion in assets, was the largest when it filed in January 1990 and emerged two years later.
Kmart shares closed Tuesday at 70 cents, down $1.04 from $1.74 at Friday's close. At the end of trading Tuesday, Wal-Mart shares were up $1.66 at $58.01, and shares of Target were up $1.16 at $41.82.
``Wal-Mart has had a long-standing respect for Kmart as a competitor,'' Wal-Mart spokesman Tom Williams said. ``We don't take any pleasure in seeing them or any company struggle.
``When all is said and done, the customers are going to decide where they're going to shop,'' he said.
A creditors' committee will meet as early as next week to begin work on a plan designed to help Kmart reorganize and meet its other debts, Sonderby said. She also scheduled a dozen additional hearings between now and December, starting Feb. 13.
Earlier, Kmart's bankruptcy lawyer, John W. Butler Jr., told the court said that the company's game plan is to emerge from bankruptcy on ``an aggressive, fast track'' within the next 18 months. He said that while unsuccessful sales initiatives, stiff competition and recession were part of the problem, Kmart also was hit hard by dried-up liquidity, evaporating surety bonds and swiftly eroding vendor confidence at the beginning of the new year.
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