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Kmart posts loss of $377M

Don Hogsett -- Home Textiles Today, September 23, 2002

With comps falling at a double-digit pace throughout the summer, margins thinning and bankruptcy costs mounting, Kmart Corp. recorded a second-quarter loss of $377 million, virtually unchanged from the year-ago period.

Sales fell 15.7 percent, to $7.5 billion from $8.9 billion last year, a unnerving shortfall of $1.4 billion. The crucial gauge of same-store sales plunged by 11.0 percent, partly the result of the summer doldrums that vexed other retailers and partly because jittery consumers spent their money elsewhere.

Putting the bottom line under even more pressure, operating results were weighed down by $90 million in "accounting adjustments," most of it going back to prior financial quarters, including a $57 million charge to write off inventory-related costs, the retailer said. Explaining the fresh accounting issues, Kmart said the $57 million write-off was tied to costs "commonly referred to as inventory 'loads,' which had been capitalized into inventory. These costs, which had been recorded for internal reporting purposes, should have been eliminated" in its external financial reports, said Kmart.

Not all the news was bad, however, and even as margins continued to weaken, the retailer managed to cut its costs somewhat and work down its stockpiles. Average gross margin narrowed by 150 basis points, or 1.5 percentage points, to 17.2 percent from 18.7 percent a year ago. Caught between falling sales and narrowed margins, gross margin dollars declined by 22.3 percent, to $1.3 billion from $1.7 billion last year.

As Kmart kept closing stores and cutting costs, its overhead was reduced by 60 basis points, to 21.9 percent of sales from 22.5 percent a year ago. Working off its merchandise stocks even in the face of falling sales, Kmart reduced its inventory position by 23.1 percent, to $5.3 billion from $6.9 billion the preceding year.

Stressing that its financial position remains relatively liquid, Kmart said that, as of the August close of the second quarter, its balance sheet cash position was about $830 million. About $500 million of that represented cash in its stores and outstanding. Additionally, Kmart said it had a cash availability of about $1.45 billion remaining in its DIP financing pact.

James Adamson, chairman and ceo, said, "We continued to focus in the second quarter of 2002 on stabilizing the business and addressing the operational challenges that have hampered Kmart's financial performance. However, despite the success of initiatives such as our Customer Appreciation promotion in early June, the company's sales have improved slower than we would have liked."

Adamson added, "We are pursuing opportunities to increase store traffic and sales. Recent initiatives include the successful introduction of the Joe Boxer line of fashion and home furnishings for the Back-to-School season and the development of new marketing efforts and exclusive brands designed to appeal to Hispanic customers. We have also moved aggressively to ensure that our cost structure is properly aligned with our revenue base."

Kmart Corp.

Qtr. 7/31 (x000) 2002 2001 % change
(loss)
a-Results in the second quarter include $14 million in equity income from an unconsolidated subsidiary, compared with a year-before loss of $8 million; $15 million in charges for BlueLight.com, down 83.7 percent from a year ago; $13 million in reorganization items; and a $20 million gain from discontinued operations. Results in the 2001 quarter included an income-tax benefit of $163 million and $12 million in dividends on convertible preferred securities of a subsidiary trust.
b-Six-month results include $19 million in income from an unconsolidated subsidiary, compared with a year-before loss of $24 million; $15 million in charges for Bluelight.com, down 87.0 percent from $115 million the preceding year; an income-tax benefit of $12 million, compared with $272 million in 2001; reorganization charges of $278 million; and a $20 million gain from discontinued operations. Prior-year results included $23 million in dividends on convertible preferred securities of a subsidiary trust.
Sales $7,519,000 $8,917,000 -15.7
Oper. income (351,000) (340,000)
Net income (377,000)a (377,000)a
Per share (diluted) (0.75) (0.77)
Average gross margin 17.2% 18.7%
SG&A expenses 21.9% 22.5%
Six months
Sales 15,158,000 17,254,000
Oper. income (EBIT) (1,519,000) (549,000)
Net income (1,826,000)b (610,000)b
Per share (diluted) (3.63) (1.25)
Average gross margin 12.6% 18.4%
SG&A expenses 22.7% 21.5%


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