Kmart stock drops amid speculation over bankruptcy filing

Posted 3:07PM on Tuesday 15th January 2002 ( 23 years ago )

DETROIT - Stock of Kmart Corp. plunged close to 15 percent in midafternoon trading Tuesday, fueled by concerns over a possible bankruptcy filing amid a series of downgrades by analysts and investment rating agencies. Shortly after the market opened, the stock dropped to a new 52-week low of $2.29 from Monday's closing price of $2.84, but rebounded to $2.46 in the afternoon. 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 at the meetings, but sources close to the company said the board would be discussing its financial options, including a bankruptcy filing. 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, Standard & Poor's, one of the nation's largest debt rating agencies, lowered its credit rating on 14 Kmart-related credit lease transactions and placed them on CreditWatch with negative implications. S&P on Monday 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. The illustrious retailer has about 275,000 employees and 2,105 stores in all 50 states, Puerto Rico, U.S. Virgin Islands and Guam. It is the nation's third-largest discount retailer after Wal-Mart Stores Inc. and Target Corp. 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 bankruptcy 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." 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. He added that many of his small apparel clients are holding off on their spring shipping to Kmart for fear of not getting paid. "They are waiting to see what happens," he said. 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. On Friday, Moody's Investors Service, the other major credit ratings service, 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 on Jan. 10 said the company would not meet Wall Street's consensus expectation for earnings of one penny per 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 -- 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. David Littmann, chief economist for Comerica Inc., said he said he didn't know if a Chapter 11 filing is in Kmart's near future. The company should get some help this year from an expected decline in inflation and interest rates. Littmann said the company will need to downsize and focus its efforts on marketing itself to the average American consumer in order to stay competitive. Kmart has attempted to gain positive name recognition by signing on brands such as Martha Stewart, Disney and Sesame Street. 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.

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