Kmart Sits on Almost $2 Billion in Cash, Equivalents -- 10:07 AM EDT
Jul 12, 2002 (Detroit Free Press - Knight Ridder/Tribune Business News via COMTEX) -- Kmart Corp. might have fewer stores and customers than a year ago, but it does have plenty of cash.
One of the paradoxes of Kmart's Jan. 22 bankruptcy filing is that the Troy-based retailer today has far more money in the till than at any time in recent years.
After seeing its cash on hand hover between $285 million and $619 million each quarter since early 2000, Kmart now sits on nearly $2 billion in cash and cash equivalents. Kmart said Thursday that $1.1 billion of that is available to write checks against.
This cash reserve does not include another $2 billion in so-called debtor-in-possession financing that Kmart secured as it entered Chapter 11 reorganization in January. This in effect is a credit line with new lenders, and almost all of it remains uptapped.
By comparison, bankrupt Jackson-based retailer Jacobson Stores Inc. is so strapped for cash that it is close to selling or liquidating its operations.
Shielded from creditors by its bankruptcy filing, Kmart relies on its cash hoard to survive long enough to turn around the company. For one thing, the cash will allow the company to stock up on merchandise for the Christmas holiday shopping season.
Lots of cash also reassures Kmart's vendors that they're likely to get paid. That makes them more willing to do business with Kmart on normal terms.
"It takes cash to fund a turnaround," Al Koch, Kmart's chief financial officer since March, told the Free Press this week. "We have to rebuild a lot of stuff, and it takes cash to do that. Cash is the fuel that drives the engine of a turnaround."
Bankruptcy lawyer Marc Bakst of the Detroit firm Bodman, Longley & Dahling agreed. "It's like any business," he said Thursday. "Having good liquidity gives them the ability to deal with their ongoing operations in a less stressful environment."
A serious cash squeeze last year plunged Kmart into bankruptcy in the first place. Chuck Conaway, the former chairman and chief executive who left the company in March, had spent more than $1 billion on an updated inventory control system. He also cut back on advertising in a move that analysts say cost the company needed sales and cash.
By January, Kmart was having trouble paying key suppliers such as Fleming Companies Inc., its main supplier of groceries. When Kmart was unable to pay $78 million it owed Fleming, the supplier cut off shipments, precipitating a crisis. Kmart filed for bankruptcy the next day.
Just how Kmart accumulated all its cash since the bankruptcy filing in January isn't that hard to understand. When a company files for reorganization under Chapter 11 of the bankruptcy code, the law permits it to stop paying most of the bills run up before the filing.
Among other obligations it stopped paying, Kmart saves about $400 million a year by not paying interest on about $5 billion in unsecured debt, Koch said.
Meanwhile, with payment more or less assured, Kmart's vendors have been willing to extend normal trade terms to sell the retailer merchandise. That means Kmart can take delivery of material from its suppliers and not have pay for it for 30 days in most cases.
Rules of accounting allow Kmart to count this revolving trade credit as a cash equivalent on its books, further enhancing its liquidity. About $1 billion of Kmart's cash pile comes from these vendor credits.
It's important to remember that, in the world of corporate accounting, cash does not necessarily equal profit. For the first quarter ending May 1, Kmart reported a net loss of $1.45 billion, or $2.88 per share, and Koch admitted the company still loses money on operations.
But some of the first-quarter losses that Kmart reported were generated by paper write-offs as the company reorganizes. Paper write-offs do not burn cash. Meanwhile, the new vendor credits create liquidity regardless of whether Kmart makes a profit or loss on merchandise.
Cash alone, of course, does not ensure a return to financial health for Kmart, the nation's third-largest retailer with more than 1,800 stores, 225,000 employees, and annual sales last year of $36 billion.
Even more crucial to long-term health is getting customers back into stores, especially during the holidays. A weak Christmas sales performance last year was one of the things that tipped an ailing Kmart into bankruptcy.
But Koch said that, if Kmart is careful about how much product it buys in anticipation of the holiday season, even a weaker-than-expected performance this Christmas won't prove fatal.
"If we run the business right, it won't turn up and bite us in the butt," Koch said. "But if we ran it wrong, we could buy lots of inventory, lots more than we could sell. That's what happened last year. They bought lots of inventory and it didn't sell."
He added, "We will size the orders to the store network that we have and to the foot traffic that we anticipate. If we're reasonably close, then everything's going to be fine. You'd have to be way off to not have it work out OK."
Kmart's cash reserve won't sit idle for long. Soon, Kmart will draw down all its cash and about $1.8 billion of its new borrowing power to stock up on merchandise for the holiday rush.
As that merchandise sells out, the company will pay back the short-term loans and replenish its cash. By January, Koch said, the cash position should be back to near what it is today.
Liquidity is important in all kinds of businesses. Recently, Northwest Airlines Corp., the dominant carrier at Detroit Metro Airport, was able to resist moves by rival airlines to raise ticket prices because Northwest had more cash on hand than other carriers.
Having a lot of cash also allows companies to ride out smaller disappointments. For example, customers have been returning to Kmart's stores since the bankruptcy filing at a slower pace than hoped for, Koch said, but the cash stash allows the company to be patient.
"Someone like Jacobson's frankly probably ran out of time because they were going to run out of money before they could get it fixed," Koch said.
"The amount of time you have to a restructuring successfully is directly related to how much money you have and how long it's going to be before you run out of money."
If Kmart can complete its bankruptcy reorganization successfully in late 2003 or early 2004, most of the cash reserve would get distributed to creditors in a settlement.
"You don't want to burn through a lot of your cash reserve" too soon, Koch said. "We may have to burn through some. We'll do what we have to to run the business intelligently."
By John Gallagher
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