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Kmart casts shadow
©Associated Press NEW YORK -- Kmart Corp.'s Chapter 11 bankruptcy is expected to have far-reaching and painful repercussions, from Main Street to fashion's Seventh Avenue. The nation's third-largest discounter -- whose bankruptcy filing Tuesday is the largest involving a retailer in U.S. history -- is expected to close several hundred of its 2,100 stores and lay off thousands of its 240,000 employees over the next couple of months. That will mean lost business for suppliers, particularly small companies that are already squeezed by the recession, and for many of the discounter's landlords, which will have to scramble for new tenants at lower rents. Then there are dozens of Kmart's secured creditors, from Fleming Cos. to Mattel Inc. and Nintendo of America Inc., which are owed millions of dollars, according to the bankruptcy filing. The most widely known may be Martha Stewart, whose Martha Stewart Living Omnimedia is owed $13-million from Kmart. Moreover, Kmart's employees face an uncertain financial future, as more merchants are expected to shutter stores this year, following a difficult holiday season. "I lost everything I had. After 20 years, it's gone," said Rita Sassin, 55, a cashier at the Roseville, Mich., Kmart store who already has had her hours reduced and her benefits cut. The extent of Kmart's downsizing is not known, as the discounter plans to announce more details of its restructuring strategy over the next couple of weeks. But Wall Street's estimates of the store closings range from 250 to 700 stores. The company did state in its filing that it seeks to terminate the leases of about 350 stores that already were closed or subleased to other companies. Kmart is also reviewing the profitability of hundreds of its stores. It also plans to reduce annual expenses by an additional $350-million through staff reductions, office consolidations and other actions. "Until Kmart decides what they are going to be, the lives of thousands of people and companies are going to hang in the balance," said C. Britt Beemer, chairman of America's Research Group, headquartered in Charleston, S.C. "Kmart is a big company representing large blocks of sales to suppliers. This will be a time for the company to decide which categories to shut down and which to expand." Meanwhile, a slew of Kmart suppliers, anticipating reduced potential revenue in the wake of the Chapter 11 filing, have now warned that profits will be below Wall Street expectations. Vendors also find themselves in a delicate situation, aiming to reduce their financial risks while trying not to offend Kmart. Some suppliers are still holding off on shipping to Kmart, waiting for payment guarantees from companies known as factors that act as intermediaries. Of course, Martha Stewart, whose brand is the top-selling label at Kmart, finds herself in a most precarious position. Martha Stewart Living Omnimedia has a provision in its contract allowing the designer to leave Kmart in bankruptcy, but that would have to be approved by a bankruptcy judge. And analysts say that Stewart has to be careful not to make any moves that would trigger a lawsuit from Kmart, while still protecting her brand. Martha Stewart Living Omnimedia receives about 13 percent of the company's revenue from Kmart and 27 percent of earnings before interest, taxes, depreciation and amortization, excluding Internet losses, according to Kevin Gruneich, an analyst at Bear Stearns. Martha Stewart Living issued a release Tuesday saying that Stewart won't pull her line of home and garden products from Kmart stores "for the foreseeable future." Stewart said the company is confident Kmart will take steps to make payments as fully and promptly as possible. Analysts say keeping the brand is a must for the discount retailer. Losing Martha Stewart "would be a huge loss to the company," said Eric Beder, an analyst with Ladenburg, Thalmann & Co. "What makes people come to your store . . . is the type of merchandise that you yourself have exclusively," said Ulysses A. Yannas, an analyst with Buckman, Buckman & Reid. Handleman Co. a distributor of prerecorded music to mass merchants, said that its fiscal third-quarter results will be hurt, though it said the implications of the Chapter 11 filing are still unclear. About 35 percent of Handleman's fiscal 2001 sales are generated from Kmart. Fleming, Kmart's primary food and consumable products supplier, which cut off shipments to Kmart on Monday, now intends to resume deliveries "once receiving satisfactory assurances from Kmart via the bankruptcy court." However, Kmart's expected store closings create uncertainty for Fleming's profit outlook. Fitch & Co. and Standard & Poor's have placed its ratings on CreditWatch for possible downgrades. Sales to Kmart account for 20 percent of Fleming's total revenues. Meanwhile, Kimco Realty Corp., the nation's largest owner and operator of neighborhood and community shopping centers, has lowered its earnings forecast for the year, following Kmart's filing. Kimco currently leases 75 locations to Kmart, accounting for about 12 percent of its total rental revenue, Kimco said. "There will be a lot of downtime as the landlords try to find tenants," said Michael Mueller, an analyst at CIBC World Markets Corp. He added that landlords face the risk of reduced income if they can't rent the space at the rate Kmart was paying. Kmart was paying Kimco $10 per square foot, but the market value is now down to $5 to $7 per square foot, he said. Perhaps the most vulnerable are the smaller companies, which can't afford any more financial risks, after getting burned on liquidation filings from Montgomery Ward to Bradlees Inc. Kmart shares rose 20 cents Wednesday to close at 89 cents a share.
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From the Times Business report
From the AP
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