Kmart files for bankruptcy protection, becomes largest retailer ever to seek protection

ALEXANDRA R. MOSES, Associated Press Writer

DETROIT (AP) — Kmart Corp., the discount chain that gave America the BlueLight Special and introduced Martha Stewart home fashions at cut-rate prices, filed for Chapter 11 bankruptcy Tuesday.

Kmart becomes the biggest retailer in history to seek court protection from creditors.

The nation’s No. 3 discounter had long struggled to compete with the low prices of Wal-Mart and the up-to-the-minute products at Target. It went into an alarmingly steep slide after a disappointing holiday season, and failed to pay its top food supplier $78 million over the weekend.

Analysts said they expect Kmart to close as many as 700 of its 2,114 U.S. stores. Kmart said only that it will close weak stores and that it expects to emerge from Chapter 11 next year.

“We are determined to complete our reorganization as quickly and smoothly as possible,” chief executive Chuck Conaway said.

Kmart, which has 275,000 employees, said it has secured $2 billion in financing to keep going.

On the New York Stock Exchange, Kmart stock dropped 60 percent Tuesday, or $1.04, to close at 70 cents. Its stock had traded as high as $13.55 last summer.

By the time Kmart figures out its business strategy, customers may have found somewhere else to shop. Analysts said filing for bankruptcy means the shelves are not going to be fully stocked, something Kmart is already struggling with.

“You’re going to frustrate customers and they’re going to go and it’s going to be hard to get them back,” said Emme Kozloff with Bernstein Sanford.

The first Kmart discount store was founded in 1962 and the chain got its official corporate badge in 1977, when the S.S. Kresge Co. changed its name to Kmart Corp.

Kmart introduced the BlueLight Special in 1965, flashing blue police lights in the aisles to lure customers to discounted items.

The Martha Stewart Everyday brand, which includes sheets, towels, paints and kitchenware, is Kmart’s largest volume-producing label, generating about $1.5 billion in sales last year.

Stewart has a provision in her contract that allows her to exit Kmart in case of bankruptcy, but such a move has to be approved by a bankruptcy judge. Martha Stewart officials did not return calls for comment.

Kmart has nearly $16.3 billion in assets, making it the largest retailer ever to declare bankruptcy. Federated Department Stores, with $9.1 billion in assets, was the biggest when it filed for bankruptcy in 1990.

Last week, Kmart ousted its president and named a new chairman, James Adamson, to replace Conaway, who remains as chief executive. On Tuesday, it named Ronald Hutchison as the head of its restructuring.

Hutchison, 51, was most recently chief financial officer of Advantica Restaurant Group Inc., where he and Adamson were instrumental in the company’s reorganization.

Faced with the successes of Wal-Mart and Target, Kmart has tried to go after the mother through partnerships with Stewart, Walt Disney and Sesame Street. Analysts said the strategy still lacks clarity.

“I think it will be extremely difficult to pull out of this,” said Kevin Murphy, a research director of retail operations at Gartner G2, a research firm. “Just cutting back on unprofitable stores isn’t going to save the company … they need to find some point of focus.”

The bankruptcy filing in federal court in Chicago was good news for Kmart’s suppliers, including food wholesaler Fleming Cos. The company cut off shipments Monday, saying it was owed $78 million.

Fleming said Tuesday it intends to resume deliveries to Kmart “upon receiving satisfactory assurances from Kmart, via the bankruptcy court.”

Other suppliers have delayed or stopped shipments to Kmart, but the bankruptcy filing is expected to restore their confidence.

Still, “the one thing Chapter 11 can’t solve is the quality of actual merchandise and sales,” said bankruptcy expert Martin Zohn of Proskauer Rose LLP.

At Big Kmart in Roseville, Mich., cashier Rita Sassin, 55, said the company had to make sure it kept shelves full for customers.

“To heck with the rain checks, they want the items,” she said.


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