DETROIT - Kmart Corp., known for its BlueLight Special and discount prices, on Tuesday became the largest retailer to declare for Chapter 11 bankruptcy protection.
The No. 3 discount retailer has struggled in the fiercely competitive discount market and debt rating agencies, including Standard & Poor's, have in recent weeks lowered their credit ratings for Kmart.
Kmart said in a release it had secured a $2 billion senior secured debtor-in-possession financing facility from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and JP Morgan Chase Bank, which will act in various capacities including as collateral monitors, documentation agents and syndication agents.
The filing was made in U.S. Bankruptcy Court for the Northern District of Illinois, in Chicago.
The company said that it will reorganize on a fast-track basis and has targeted emergence from Chapter 11 in 2003.
Kmart's bankruptcy declaration is the largest in the retail business. Previously Federated Department Stores Inc. was the largest when it filed for Chapter 11 in 1990 and emerged two years later.
Federated Department Stores at the time had assets of $11.4 billion when it filed in January 1990. Kmart's assets in its latest Securities and Exchange Commission filing were more than $17 billion.
"We are determined to complete our reorganization as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," Kmart CEO Chuck Conaway said in a statement.
Its stock plunged and the company was removed from Standard & Poor's benchmark index of 500 leading stocks.
Kmart officials on Jan. 10 announced that the company would not meet Wall Street's consensus expectation for earnings of a penny a share for fiscal 2001, and suggested it may seek additional financing.
The holiday shopping period didn't help Kmart rebound. The company said that for the five-week period ended Jan. 2, 2002, the close of its fiscal year, net sales slipped 1 percent on a same-store basis from the previous year.
Total net sales for the period were $5.52 billion, down slightly from $5.54 billion for the same period last year, Kmart said.
Kmart said its decision to seek bankruptcy protection was based on a combination of factors, including its below-plan sales and earnings performance in the fourth quarter.
S&P dropped Kmart's corporate credit rating from a BB to a B- and its preferred stock rating dropped from a B to a CCC-. It also said the retailer was on its list of companies to watch with negative implications.
Moody's Investors Service, the other major credit ratings service, lowered Kmart's debt two notches, citing the company's poor sales and doubts about its recent turnaround efforts.
On Monday, Kmart failed to make a regular weekly payment to its primary food distributor. Fleming Cos. cut off shipments to Kmart, saying it was owed $78 million by Kmart.
Other suppliers have delayed or stopped shipments to Kmart in recent days, but the Fleming situation posed perhaps the biggest crisis yet, because grocery offerings often drive traffic.
"I don't think there's any surprise here," said Wayne Hood, with Prudential Securities Inc.
Hood said Kmart has to restructure its debt, close unproductive stores and streamline at the corporate level.
But in its release Tuesday, the company said all 2,114 Kmart stores would remain open.
At a Kmart store in Greenville, Mich., Carl Rittersdorf said he would feel bad if his local Kmart closed. He and four friends meet for breakfast at the Kmart cafeteria every Tuesday.
"I like it here. I like the people," Rittersdorf said.
If the store closes, he said he'll have to go across the street to Meijer, a discount retailer based on western Michigan.
Since Conaway became Kmart's CEO in May 2000, he has closed unproductive stores, reintroduced the BlueLight Special, and made other changes to help the discount retailer become more productive and more efficient.
The Martha Stewart Everyday brand, which covers such products as sheets, towels, paints and kitchenware, is Kmart's largest volume-producing label, generating about $1 billion in sales last year.
The BlueLight Special marketing tool, first introduced in 1965 and retired in the 1990s, offers customers lowered everyday prices on more than 30,000 items.
Despite its current woes, Kmart has seen improvements since it was at the brink of death in the mid-1990s, when the company suffered heavy losses, closed stores and laid off employees.
But the No. 3 retailer faces intense competition from No. 1 Wal-Mart Stores Inc. and No. 2 Target Corp.
Analyst Michael Bernacchi, a professor of marketing at the University of Detroit Mercy, said Kmart suffers because it isn't seen as deep a discounter as Wal-Mart, and it doesn't have the upscale touch that the Minneapolis-based Target portrays.
Last week, another Michigan-based company, specialty retailer Jacobson Stores Inc., announced it had filed for Chapter 11 bankruptcy protection and would close five of its 23 stores.
In 1977, the S.S. Kresge Co. -- founded in 1899 by Sebastian S. Kresge -- changed its name to Kmart Corp. to reflect that in 1976, sales at Kmart stores accounted for 94.5 percent of the company's domestic consolidated sales. The first Kmart discount store was founded in 1962.
By the 1980s Kmart was a staple in thousands of cities across the country.
Wal-Mart surpassed the company in the early 1990s, and Kmart was at the brink of extinction in the mid-1990s, when the company suffered heavy losses, closed stores and laid off employees.
Kmart has about 275,000 employees and its stores in all 50 states, Puerto Rico, U.S. Virgin Islands and Guam.
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