Originally created 01/24/02

Store began with vision, needs to find that again



DETROIT - When Sebastian S. Kresge opened his first store in Detroit in 1899, he sold everything for 5 or 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.

On 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, a senior partner at 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, Mich.-based Kmart said it will evaluate the performance of every store and terms of every lease by the end of first-quarter 2002, and will close unprofitable and underperforming stores. Some analysts said Kmart will 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.

The company, 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 named Ronald B. Hutchison the executive vice president and chief restructuring officer. Mr. 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 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 re-engineering 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.
  • Some suppliers have delayed or stopped shipments to Kmart in recent days. But bankruptcy expert Martin Zohn, of 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," Mr. Zohn said. "The one thing Chapter 11 can't solve is the quality of actual merchandise and sales."