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Sales down, Kmart slashes loss in Q1

Climbing back on track after emerging from Chapter 11, Kmart Corp. slashed its operating losses — before one-time restructuring and reorganization costs — and came close to break-even, generating a modest operating loss of just $2 million, compared with last year's daunting operating loss of almost a billion dollars.

On paper, the retailer recorded a net loss of $862 million, down from $1.4 billion last year, but included in the total were bankruptcy and restructuring charges that totaled $806 million and interest costs of $57 million.

Sales at the discount giant declined by 13.9 percent, due largely to store closings as part of a sweeping overhaul of operations during the bankruptcy. But same-store sales fell by 3.2 percent during a broadly rocky retail environment, as the retailer worked to find a winning merchandising formula and a viable marketplace niche.

Driving the bottom-line improvement, average gross margin more than doubled, climbing to 23.0 percent from 10.4 percent last year when the retailer marked down prices in clearance sales as it shut down hundreds of stores. Weakening year-ago margins was a $542 million charge recorded during the first quarter of 2002, in connection with store closing liquidation sales. Helping margins gain strength this year, the retailer said, was a decrease in sales of food and consumables, which carry lower margins, and a decrease in promotional markdowns, partially offset by the impact of some clearance markdowns as the company closed more stores in 2003.

Operating costs were pared, but not quite enough, and still exceeded gross profit by $2 million, producing the small operating loss. Costs were whittled back by 30 basis points, or three-tenths of a percentage point, to 23.0 percent of sales from 23.3 percent last year. Measured in absolute dollars, costs were pared by 14.9 percent, or $249 million, to $1.4 billion from $1.7 billion. Lower costs reflected store closings and lower payroll costs as a result of a cutback in headquarters staff, as well as lower utility costs and electronic media advertising.

Julian Day, president and ceo, commented, "This management team is very focused on building the financial foundation of the new company. We are strengthening our business by driving profitable sales, identifying opportunities to further improve efficiency and reduce costs, and enhancing the productivity of our assets. We have increased gross margin, decreased SG&A (selling, general and administrative costs) and carefully managed our inventory."

As of the close of the quarter, Kmart had about $1.23 billion cash on hand, down about 33.6 percent form last year, and borrowing availability of about $1.5 billion on its $2 billion credit facility, including outstanding letters of credit.

Kmart Corp.

Qtr. 4/30 (x000) 2003 2002 % chg
a-First-quarter results include $37 million in restructuring, impairment and other charges; $7 million in equity income from a subsidiary, compared with $5 million in equity income last year; $769 million in bankruptcy reorganization items, compared with $251 million a year ago; a $6 million income-tax benefit, compared with a year-ago tax benefit of $12 million; a $10 million loss from discontinued operations, compared with a year-before loss of $250 million.
Sales $6,181,000 $7,181,000 -13.9
Oper. income (EBIT) (2,000) (925,000)
Net income (862)a (1,442)a
Per share (diluted) (1.65) (2.87)
Average gross margin 23.0% 10.4%
SG&A expenses 23.0% 23.3%

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