Kmart shares fall on ratings cuts, financing concerns
Bloomberg News
Published Jan 15 2002
TROY, MICH. -- Kmart Corp. shares, which lost about a third
of their value last week because of concern about the
company's financing, plunged again after Moody's Investors
Service and Standard & Poor's cut the chain's ratings.
The stock fell 46 cents, or 14 percent, to $2.84. Kmart's 9.38
percent notes maturing in 2006 fell about 4 cents to 60 cents on
the dollar Monday, traders said. That pushed the yield up to
almost 26 percent from 24 percent.
Kmart said last week that it is seeking additional funds after
failing to turn a profit this fiscal year and setting back CEO
Chuck Conaway's turnaround plans. The No. 2 U.S. discount
chain has $1.5 billion in loans expiring in December and
probably will have to secure its next round of loans with
company assets, Moody's said. That means holders of unsecured
bonds would have fewer assets to claim in the event of a
bankruptcy filing.
"Things were not as good as we might have hoped," said Gerald
Hirschberg, an S&P director who heads up the ratings firm's
retail group. "We also heard from their vendors, who were
concerned about Kmart's liquidity. Whether those concerns
are real or imagined isn't so important."
S&P cut its junk ratings on Kmart by four levels to B-today.
Moody's lowered its rating three notches to B2 on Friday after
the close of regular trading.
Moody's also said it's reviewing debt ratings of Fleming
Companies, Kmart's main food supplier, for a possible
reduction. Fleming shares fell 57 cents to $17. The distributor
said Kmart is paying its bills on time. Under the companies'
contract, Kmart must pay its invoices within seven days.
Procter & Gamble Co., the biggest U.S. household-goods
maker, also is getting paid on time and hasn't changed the
terms of its supply agreements, said Tami Jones, a
spokeswoman for the maker of Pampers diapers and Cover Girl
cosmetics. Kmart is the company's biggest customer after
Wal-Mart Stores Inc.
Kmart spokesman Jack Ferry said the retailer is current in all
of its contracts with suppliers. He declined to say how talks with
lenders are progressing.
The company will hold a regularly scheduled board meeting
today, Ferry said. He said he didn't know what would be
discussed. Kmart will report results on March 5 for the fourth
quarter and year ending Jan. 30.
Kmart, based in Troy, Mich., has about 250,000 employees and
2,100 stores. Analysts including Bruce Missett of Morgan
Stanley and Emme Kozloff of Sanford C. Bernstein have said
they expect the company to shut more than 200 stores.
Prudential Securities analyst Wayne Hood has said Kmart may
find it easiest to restructure under bankruptcy protection from
creditors.
"I wouldn't rule it out," said Midwest Research analyst Jeff
Stinson, who rates Kmart a "neutral" and doesn't own the
stock. "If in the next 90 days they can get a [loan] in place and
expanded, bankruptcy isn't likely to be a near-term issue. If
you can't get that done, [bankruptcy] becomes a bigger question
mark."
Kmart has failed to lift same-store sales in four months. The
company cut advertising too steeply at the start of the holiday
season, reducing the number of shoppers that visited its stores,
and its price-cutting plan backfired when Wal-Mart
responded with even deeper discounts that Kmart couldn't
match, analysts said.
Conaway, a former CVS Corp. drugstore executive who was
hired by Kmart in May 2000, has been trying to rebuild the
retailer's outdated distribution network and improve the
chain's image by improving customer service and keeping
popular goods in stock. He also has been expanding the Martha
Stewart Everyday home goods brand, a label exclusive to
Kmart in the United States.
"If you look at the magnitude of the changes they were trying to
accomplish, it got tough to keep near-term results afloat,"
Stinson said.
Kmart's December same-store sales fell 1 percent from a year
earlier. Wal-Mart reported an 8 percent gain, while Target
Corp., the third-largest U.S. discount chain, had a 1.8 percent
increase at its namesake stores.
Moody's on Friday said the outlook for Kmart remains
negative. S&P said the retailer's ratings are under review for
further reduction.
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