Struggling Kmart files for Chapter 11

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DETROIT – 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 operates six stores in Maine, in Madawaska, Presque Isle, Bangor, Waterville, Augusta and Auburn.

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

U.S. Bankruptcy Judge Susan Pierson Sonderby approved the financing late Tuesday. The money came from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and J.P. Morgan Chase Bank.

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.

Citing concern for Kmart’s 474 workers in Maine and their retirement savings, U.S. Sen. Susan Collins asked Secretary of Labor Elaine Chao on Tuesday to investigate the company’s pension and 401(k) plans to make sure the company is abiding by laws designed to protect the investor.

“Press reports indicate that Kmart had contributed its company stock in its 401(k) plan as a match to employee contributions, and that currently, 10.5 percent of the total assets of the Kmart plan consist of these shares,” Collins said in a letter to Chao. “This statistic is alarming because of the precipitous drop in the value of Kmart stock in the past few months.”

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.”

Kmart Corp. facts

Facts about discount retailer Kmart Corp., which on Tuesday filed for Chapter 11 bankruptcy protection:

Headquarters: Troy, Mich.

Employees: About 275,000.

Stores: More than 2,100 in all 50 states, Puerto Rico, U.S. Virgin Islands, Guam.

Financial: Lost $224 million during third quarter ended Oct. 31, 2001. Fiscal year ended Jan. 2.

CEO: Chuck Conaway

Chairman: James B. Adamson

Source: Kmart Corp. 2000 annual report.