Kmart Records Big Profit in 3Q

Don Hogsett, November 29, 2004

Troy, Mich. — Boosting margins and raising cash by selling some stores, Kmart Holdings gave Wall Street and investors a double dose of good news, recording a third quarter profit of $553 million, then saying it's buying Sears, Roebuck.

Providing a big lift to the bottom line, the retailer said it raised $807 million by selling some stores to Sears and Home Depot. In another boost to profits, the retailer sharply widened its margins, 320 basis points, or 3.2 percentage points, to 26.1 percent from 22.9 percent the preceding year. Reflecting the stronger margins, Kmart recorded an operating profit of $102 million, bounding back from a prior-year operating loss of $12 million.

But still on a downward trajectory, sales skidded 13.7 percent, to $4.4 billion from $5.1 billion last year.

The crucial gauge of same-store sales continued to slide at a double-digit pace, declining 12.8 percent, but even that was an improvement over a deeper slide of 14.9 percent reported during the second quarter.

Aylwin Lewis, president and CEO, commented, “We are pleased that the company continued to make good progress in improving profitability in the quarter. In addition, with same-store sales in October improving relative to the year-to-date trend, although still negative, we are beginning to see stability as we anniversary the advertising, promotional and inventory changes instituted last year. More importantly, we have achieved this improvement without altering our focus on profitable sales. While we are not yet satisfied with the results, we believe it provides us a solid base for improvement in the important fourth quarter.”

Looking to shore up sales, Kmart has upgraded two key departments — apparel and electronics — said Lewis. “This quarter, we completed our home electronics reset, and continued the rollout of our new, more stylish and higher-quality apparel lines.” Additionally, Kmart has overhauled its Web site,, and said it will launch a new private-label credit card, Kmart Rewards.

Kmart Holding Corp.

Qtr. 10/27 (x000) 2004 2003 % change
a-Third quarter results include a gain of $807 million on the sale of assets, compared with a $1 million gain a year ago; $1 million in bankruptcy-related recoveries; a $335 million income-tax provision, compared with a year-before tax benefit of $11 million. The prior-year quarter included $1 million in income from unconsolidated subsidiaries.
b-Nine-month results include a $911 million gain on the sale of assets, compared with a prior-year gain of $3 million; $3 million in equity income from unconsolidated subsidiaries, compared with $10 million a year ago; a $485 million income-tax provision, compared with a year-before tax benefit of $21 million. Prior-year results included $37 million in restructuring, impairment and other charges.
Sales $4,392,000 $5,092,000 -13.7
Oper. Income (EBIT) 102,000 (12,000) --
Net income 553,000a (23,000)a --
Per share (diluted) 5.45 (0.26) --
Average gross margin 26.1% 22.9% --
SG&A expenses 23.7% 23.2% --
Nine months
Sales 13,792,000 16,925,000 -18.5
Oper. Income (EBIT) 438,000 (6,000) --
Net income 801,000b (890,000)b --
Per share (diluted) 7.93 (1.97) --
Average gross margin 25.6% 22.6% --
SG&A expenses 22.4% 22.6% --

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