Kmart
The Bankruptcy and What Comes Next
Jordan Pratzel, BBA1
Issue date: 1/28/02 Section: Markets
| |
|
Kmart has approximately $17 billion in assets with annual revenues approaching $37 billion. The bankruptcy filing came only a day after Kmart’s largest food distributor, Fleming Companies, halted shipments because Kmart failed to pay their bill for the previous week. Kmart officials admit that the company has $1.6 billion in debt, but note that they just secured 2 billion in financing to cover this debt and expect to be out of bankruptcy within one year. CEO Charles Conaway made a statement in which he said that Kmart wants to reorganize as quickly and smoothly as possible.
Positive news is that all 2,114 Kmart stores are open and operating under normal conditions. No employees have been laid off yet as a result of the bankruptcy and employee pension plans will not be harmed. Kmart is, however, evaluating all of its locations with plans to close up to 500 unprofitable locations in addition to the 350 locations closed last year. Kmart hopes that future store closings and job cuts will result in annual savings of $350 million.
Part of the downfall for Kmart was an attempt to compete with other discounters such as Wal-Mart and Target. Kmart lost a great deal in profits when it attempted to meet Wal-Mart in prices. Then, after this failed, Kmart started to end promotions at a time when Wal-Mart and Target were expanding promotions. Experts note that attempting to compete with Wal-Mart on price was impossible for Kmart to do. Instead, many experts suggest that Kmart build a new identity and use it as a strategic weapon. This will allow Kmart to compete with other titans without lowering prices and hurting the bottom line. This is an interesting dilemma for Kmart, who once dominated the discount market. Finding a new identity, however, is now imperative if Kmart is going to recover and survive. Many of Kmart’s stores are in poor condition and often have shelves that are not full. Creating a new image could mean massive amounts of money spent on clean-up and refurbishing the older stores. It is estimated that this could cost as much as $5 million per store.
One positive for Kmart is Martha Stewart. The Martha Stewart line of affordably priced house-wares is unique to Kmart. When Kmart filed for bankruptcy, Stewart had the option of breaking her ties with the company, but she chose not to. The Martha Stewart name is a very valuable asset and can help Kmart in establishing itself as a carrier of a unique line of designer products. Part of the restructuring may even involve an advertising campaign with Martha Stewart personally helping. The Martha Stewart products are capable of greater sales and can draw in potential customers of other Kmart products.
Another positive for Kmart is the support it may receive from suppliers and vendors associated with the discount giant. Many companies that do regular business with Kmart have a vested interest in seeing Kmart survive. If liquidation should occur, not only do they lose what is currently owed to them, they also lose the potential for future sales to Kmart. In addition, several real estate companies will lose millions if Kmart does not pay current debt on leases and millions if Kmart does not continue those leases. Other companies that do a great deal of business with Kmart that could potentially suffer if the restructuring fail are Procter and Gamble, Handleman Co., and Cardinal Health.
One key figure in the turnaround is Ronald Hutchinson. Hutchinson is the newly appointed chief restructuring officer, a new office created specially for this situation. He will, along with new chairman James Adamson, be responsible for many aspects of the restructuring necessary to bring Kmart out of bankruptcy. Kmart has set very lofty goals for the turnaround and given itself a very short time period in which to compete.
