Kmart posts $368 million 3Q loss

Don Hogsett, Staff Staff, January 6, 2003

With same-store sales still trailing off and margins under pressure, bankrupt Kmart recorded a worsening $368 million third quarter loss, compared with last year's deficit of $275 million.

After shuttering 283 underperforming stores earlier this year, Kmart sales declined 16.1 percent, to $6.7 billion from $8.0 billion last year. The crucial gauge of same-store sales fell 7.6 percent. But the same-store sales trend had improved somewhat moving through the third quarter, and during the last 30 days of the period same-store sales had declined at a more modest pace of 3.9 percent.

Acting as a further drag on the bottom line, average gross margin thinned by 240 basis points, or 2.4 percentage points, to 17.0 percent from 19.4 percent a year ago.

Operating costs were whittled down during the quarter, to 22.5 percent of sales from 22.8 percent a year ago. Measured in absolute dollars, costs were slashed by 17.5 percent, generating a cash savings of $320 million.

Despite the widening losses, the retailer said it's still on track to exit from bankruptcy sometime this year. James Adamson, chairman and ceo, commented, "We continue to make good progress in many areas. Our reorganization team is hard at work finalizing a comprehensive business plan, analyzing our store base and taking other actions necessary to fulfill our goal of filing a proposed plan of reorganization with the court and emerging from Chapter 11 court protection as early as practicable in 2003."

Scoping out sales over the holiday period, Julian Day, Kmart president and coo, said, "The post-Thanksgiving period also started strong, but sales in the last two weeks have been softer than we had anticipated."

Day said, "We remain very focused on improving our gross margin management process, working on our cost base and increasing our inventory turns. Our challenge as a promotional retailer is to use aggressive event and pricing strategies aimed at driving store traffic ad winning our customers back, while also providing a merchandise assortment that allows us to generate an acceptable margin rate."

Kmart said it had passed the peak borrowing period for its seasonal inventory build in early December and has now fully repaid all of its Debtor in Possession borrowings. As of Dec. 19, the retailer said it had no borrowings outstanding and had used $326 million of its DIP credit facility for letters of credit. As of Dec. 19, the company said total DIP availability was $1.57 billion.

Kmart Corp.

Qtr. 10/30 (x000) 2002 2001 % chg
a-Third-quarter results include $8 million in income from a subsidiary, compared with $11 million last year; a $6 million gain stemming from the reversal of an earlier restructuring and impairment charge, compared with a $5 million charge in the prior-year period; an income-tax benefit of $7, compared with a prior-year tax benefit of $127 million; and a $1 million gain from discontinued operations; the 2001 third quarter included $11 million in dividend payments on convertible preferred stock.
b- Nine-month results include $27 million in income from a subsidiary, compared with a $13 million loss the prior year; $9 million restructuring, impairment and other charges, compared with $120 million a year ago; $278 million in bankruptcy costs; an income-tax benefit of $19 million, compared with a tax benefit of $362 million last year; and a $37 million gain from discontinued operations; the prior-year third quarter included a $34 million in dividend payments on convertible, preferred stock.
Sales $6,729,000 $8,019,000 -16.1
Oper. income (EBIT) (368,000) (275,000)
Net income (383,000)a (249,000)a
Per share (diluted) (0.76) (0.50)
Average gross margin 17.0% 19.4%
SG&A expenses 22.5% 22.8%
Nine months 2002 2001 % chg
Sales 21,887,000 25,273,000 -13.4
Oper. income (EBIT) (1,812,000) (724,000)
Net income (2,118,000)b (796,000)b
Per share (diluted) (4.21) (1.62)
Average gross margin 14.1% 19.1%
SG&A expenses 22.3% 21.9%

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