Kmart's uncertain future may affect metro area

DETROIT - Shares of Kmart Corp. dropped almost 14 percent Tuesday, fueled by concerns over a possible bankruptcy filing amid a number of downgrades by analysts and investment rating agencies.

Shares were down 39 cents to $2.45 each on the New York Stock Exchange.

Standard & Poor's, one of the nation's largest debt rating agencies, announced that it will take the retailer off its 500 index after the close of trading Wednesday. David Blitzer, managing director of quantitative services for S&P, said Kmart was removed "because of its low stock price and the company's financial instability."

Kmart spokesman Jack Ferry confirmed that the company's board of directors was holding a previously scheduled meeting Tuesday and also held committee meetings Monday.

Ferry declined to say what the board was discussing, but sources close to the company said board members were discussing the retailer's financial choices, including a bankruptcy filing.

"I think they are looking at their liquidity options, and their options of closing stores," said Marie Driscoll, an analyst at August Research, an independent investment firm.

Driscoll and other analysts expect that Kmart, the nation's third largest discounter behind Wal-Mart Stores Inc. and Target Corp., could close as many as 200 to 400 of its approximately 2,100 stores. A Chapter 11 filing for bankruptcy protection would make it less costly to extricate Kmart from the leases, they said.

Kmart operates more than 35 stores in the metro Atlanta area and has a distribution center in Forest Park. It operates more than 2,100 stores nationwide.

Richard L. Church, an analyst at Salomon Smith Barney, said Tuesday that it was lowering its risk rating on the Troy-based retailer from "high" to "speculative," given the uncertainties surrounding the company's situation and outlook.

"While ... we believe that Kmart has many options it can explore in order to meet its liquidity over the coming 12 to 18 months, other less quantifiable factors such as lack of vendor support have elevated Kmart's risk profile considerably more than we thought to be the case as recently as yesterday," Church wrote in a research report.

Also on Tuesday, S&P lowered its credit rating on 14 Kmart-related credit lease transactions and placed them on CreditWatch with negative implications.

S&P's reduced credit rating follows a series of downgrades over the past few days.

On Monday, S&P lowered Kmart's corporate credit rating from a BB to a B- and its preferred stock rating drop from B to a CCC-. It also said the retailer was on its list of companies to watch with negative implications.

It said those actions were based on heightened concerns about Kmart's loss of financial flexibility in recent weeks.

On Friday, Moody's Investors Service, the other major credit ratings service, had lowered Kmart's debt two notches deeper into junk status, citing the company's poor sales and doubts about its recent turnaround efforts.

Kmart officials said Jan. 10 that the company would not meet Wall Street's expectation for profits of one penny per share for fiscal 2001 based in part to disappointing holiday sales and indicated it may seek additional financing.

Howard Nemiroff, a professor of finance at Long Island University, said unless Kmart can secure additional financing in the next few days, a Chapter 11 filing within the week is likely.

Nemiroff said, however, that the company's larger suppliers could help bail out Kmart by extending credit to the retailer.

"It's generally in the company's best interest to be flexible, because they want to keep their sales up," he said. "But they're not going to keep doing that if they think they're throwing their money down a pit."

Fleming Companies Inc., one of Kmart's largest suppliers, said Monday that its relationship with the retailer remains strong and that Kmart has been current in its payments to the company.

But overall, vendors are getting fidgety.

Adam Winters, senior vice president of Merchants Factors Corp., which provides loans to small and midsize apparel companies, said that Kmart has been slower in paying its vendors since November, though not "terribly late." He added that instead of paying them 10 to 15 days late, Kmart is now paying them 20 days late.

He added that many of his small apparel clients are holding off on their spring shipments to Kmart for fear of not getting paid.

"They are waiting to see what happens," he said.

Kmart has attempted to distinguish itself from its rivals by signing on exclusive deals with Disney and Sesame Street, and by fortifying its relationship with Martha Stewart.

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.

During an informal address Monday night at an apparel industry dinner in Manhattan, Stewart, president and chief executive of Martha Stewart Living Omnimedia, acknowledged her frustrations.

"I am slightly nervous," she said. "I'm anxious to see what will happen to this large and famous company."

According to analysts, Kmart has been up-to-date on its payments to Stewart.

About 10 percent of Martha Stewart Living's revenues and 20 percent of earnings are expected to be generated this year from Kmart, according to Laura A. Richardson, an analyst at Adams, Harness & Hill, Inc.