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Kmart finds bankruptcy an expensive prospect

Weighed down by more than $760.0 million in markdowns tied to going-out-of-business sales and inventory reduction, and hobbled by $219.0 million in reorganization costs, bankrupt Kmart Corp. recorded a staggering April loss of $1.02 billion.

Sales at the beleaguered retailer declined to $3.20 billion for the five-week period ended May 2, stunted by a 16.4 percent decline in same-store sales, Kmart reported in a federal filing. Excluding the 283 stores the company is in the process of closing, sales totaled $2.10 billion.

Taking the biggest bite out of the bottom line were markdown charges totaling $760.0 million. Most of the total, $478.0 million was tied to going-out-of-business sales at the 283 stores shut or in the process of being shuttered. Another $270.0 million in markdown money stems from the acceleration of inventory reductions at remaining stores. All told, the markdown charges for the month resulted in a negative average gross margin of 3.2 percent, compared with a positive average gross margin of 18.3 percent a month before, during March.

Operating costs amounted to 20.8 percent of sales during April, compared with 25.2 percent in April, as the retailer hacked away at costs and reduced its overhead.

Additionally, bankruptcy costs totaled $249.0 million in April, with $219.0 million tied to the shutdown of 283 stores. Factored into that total are lease terminations and employee severance costs. Also, Kmart paid $21.0 million in fees to lawyers and accountants during the month and $6.0 million in bonuses handed out to retain key employees.

Kmart Corp.
Five weeks ended May 1, 2002 (x000)

a-Cost of goods sold includes non-comparable charges of $760 million; $478 million for markdowns taken on merchandise sold, or to be sold, at going-out-of-business sales at 283 store locations; and $270 million for markdowns to accelerate inventory reductions at remaining stores.
b-Bankruptcy costs include $219 million stemming from the closing of 283 stores, primarily related to lease terminations, employee severance and other liquidation costs; $21 million in accrued professional fees; $6 million of accrued bonuses to retain key employees; and $3 million in miscellaneous costs.
c-The net loss includes for April includes $12 million in interest expense, offset by a $12 million income-tax credit
Sales $3,196,000
Cost of goods sold 3,299,000a
SG&A expenses 666,000
Oper. income (EBIT) (769,000)
Chapter 11
Reorganization expense 249,000b
Net income (1,018,000)c
Average gross margin (3.2)%
SG&A expenses 20.8%

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