Wed, Jan 23, 2002 page21

• Kmart may soon file for bankruptcy

  OUR SAVING PLACE With sales down and losses rising, reports say the troubled retailer may get a bankruptcy credit line of about US$2 billion from a group of banks

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  Kmart Corp may seek bankruptcy protection as early as today in the US retail industry's biggest business failure, several newspapers reported, after slumping sales and mounting losses drained the second-largest discount chain of cash.

  The retailer's board, including former Chrysler Corp executive Thomas Stallkamp and Publishers Clearing House Chairman Robin Smith, authorized the filing after talks with banks failed to result in enough funds for a bailout, the Wall Street Journal reported. Kmart spokesman Jack Ferry didn't return three calls for comment. Directors Stallkamp, Smith, Richard Statuto, Lilyan Affinito and Richard Cline also didn't return calls.

  Kmart is expected to receive a bankruptcy credit line of about US$2 billion from a group of banks, the New York Times said, allowing it to continue operating. The retailer, with over 2,100 stores and 250,000 workers, may close as many as 500 locations in a restructuring, some analysts have estimated. Several suppliers including grocery distributor Fleming Cos suspended shipments to Kmart after the chain failed to pay its bills.

  

  Customers shop for groceries at Kmart in Bloomfield Hills, Michigan late last year. A major food distributor said on Monday that it has cut off most shipments to Kmart after the troubled discounter failed to make its regular weekly payment for deliveries. Fleming Cos said Kmart, its largest customer, owes US$78 million.

  PHOTO: AP

  "There is a severe crisis of confidence now," said Kurt Barnard, president of Barnard's Retail Trend Report. "More and more vendors are falling away. That is a prescription to order for bankruptcy."

  After accumulating US$344 million in losses the first nine months of this fiscal year, Kmart's woes accelerated during the fourth-quarter holiday season, when its sales at stores open at least a year unexpectedly fell.

  The sales decline was exacerbated by Kmart's reliance on surety bonds to back its workers' compensation and cover liabilities from selling guns and liquor, the New York Times and Wall Street Journal reported. Surety bonds are agreements by insurance agents to continue financing in case of default. The collapse of Enron Corp, which also used such bonds, led insurers to raise prices on the bonds, and in Kmart's case, demand collateral for them, the papers said.

  After the holidays, Kmart tapped the remaining credit it had on US$1.5 billion in loans extended by a group of banks led by JP Morgan Chase & Co, the New York Times reported. On Jan. 10, the retailer said it was in talks with lenders for new financing. The shares of Troy, Michigan-based Kmart have since dropped 64 percent, closing Friday at US$1.74.

  Kmart hired Henry Miller, the head of Dresdner Kleinwort Wasserstein's restructuring practice, as its bankruptcy adviser, the New York Times reported. Jack Butler, a partner at Skadden, Arps, Slate, Meagher & Flom, who has represented the company for the last several years, will be Kmart's lawyer, the paper said.

  The US$2 billion in so-called debtor-in-possession financing will be provided by lenders including JP Morgan, General Electric Capital Corp and FleetBoston Financial Corp, the papers, including the Financial Times, said. GE Capital spokesman John Oliver and FleetBoston spokesman James Mahoney declined to comment.

  Kmart on Thursday named as non-executive chairman James Adamson, a retailing veteran who guided Advantica Restaurant Group Inc. through bankruptcy. Adamson is expected to hire a former Advantica colleague as Kmart's chief restructuring officer to work with Chief Executive Chuck Conaway, the New York Times reported, citing an adviser.

  Conaway, who joined Kmart in 2000 from CVS Corp, promised investors that he would revive Kmart's sales and profit by August of this year. He pledged to match Wal-Mart Stores Inc's low prices, cut checkout waits by 20 percent and spend almost US$2 billion to upgrade computer and distribution systems.

  Those changes and the addition of snacks and groceries to Kmart's stores weren't enough to attract consumers, who kept flocking to Wal-Mart for lower prices, analysts said. Cuts in advertising spending, particularly during the holidays, further undermined Conaway's efforts to reach shoppers, they said.

  Fleming, Kmart's sole grocery distributor, said it suspended shipments after the retailer missed a US$78 million payment Friday.

  Kmart is losing money for the second straight year.

  "Kmart's ability to borrow money has come to a screeching halt," said Britt Beemer, chairman of America's Research Group.
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