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Kmart's big day out

Troy, MI — Fresh out of bankruptcy and with chief investor Edward Lampert now appointed chairman, Kmart Corp.'s new shares started trading this morning on the over-the-counter market, slipping by $1.20 in midday trading to $13.80.

Lampert, chairman and ceo of ESL Investments, which owns more than 50 percent of Kmart, said that the board will "participate very actively" in creating value. Decisions will now be made by "investors who have something to lose, as well as gain," he said.

After overcoming last-minute objections from creditor Eastman Kodak, the company emerged from bankruptcy yesterday. Kmart closed on a new $2 billion exit financing facility provided by a syndicate led by GE Corporate Financial Services, Fleet Retail Finance Inc. and Bank of American NA. The facility is secured by inventory and replaces Kmart's $2 billion DIP financing.

The retailer also reported sharply improved operational results for the month of March, narrowing its loss before one-time bankruptcy costs by almost two-thirds, to $55 million from $155 million a year ago.

Reflecting a massive overhaul and the shutdown of hundreds of under-performing stores, sales declined by 15.5 percent, to $1.9 billion from $2.2 billion during the same month a year ago. Same-store sales improved modestly, declining by 7.4 percent from a drop of 8.4 percent during the year-ago period. But the year-over-year comparison is somewhat misleading since this year's March period was missing the extra kick provided by the Easter holiday sales, which were pushed into April by a shift in the calendar.

Reflecting steadily improved operations as the giant corporation steered haltingly towards a turnaround, average gross margin widened substantially, by 240 basis points, or 2.4 percentage points, to 20.7 percent from 18.3 percent the preceding year. Gross margin dollars decreased by 4.6 percent, reflecting the lower level of sales following the chain's severe downsizing.

Operating costs improved as well, and when viewed as a percentage of sales were whittled down by 170 basis points, or 1.7 percentage points, to 25.2 percent from 23.5 percent. Measured in absolute dollars, costs were down by 21.4 percent, to $445 million from $566 million a year ago, generating a cash savings of $121 million.

In another big lift to the bottom line, Kmart hacked away at its stockpiles, reducing inventories by 22.3 percent, far deeper than the 15.5 percent decline in sales that followed a store-closing program.

Acting as a drag on the bottom line, as it paid a phalanx of lawyers and accountants, bankruptcy costs totaled $412 million, sharply higher than the $12 million in costs recorded a year ago. With all those costs tacked on, the retailer put up a loss of $483 million, compared with a $175 million deficit last year.

But pulling out all the one-time costs to create an apples-to-apples comparison, the retailer actually showed considerable improvement, narrowing its monthly loss before one-time costs to just $53 million from $155 million last year.

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