Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, November 17, 1995 TAG: 9511170028
SECTION: BUSINESS PAGE: A-15 EDITION: METRO
SOURCE: BRIAN S. AKRE ASSOCIATED PRESS
DATELINE: DETROIT LENGTH: Medium
These are not happy days at Kmart Corp.
On Thursday, the chain reported a third quarter loss of $69 million, equal to 15 cents a share, compared with profit of 8 cents a share in the 1994 quarter, when net earnings were $39 million.
Losses from continuing operations, without the effect of a $48 million gain from the sale of its Sports Authority unit, were $118 million, or 26 cents a share, vs. a profit of $21 million, or 4 cents a share, in the year-ago period. Revenues were $8 billion, up 2.5 percent from $7.8 billion in the 1994 quarter.
Most mass merchandisers are struggling in the face of intense competition and sluggish fall sales. But Kmart, trying to overcome years of lethargy, seems to have been singled out lately for Wall Street's wrath.
Consider:
Kmart stock plummeted 36 percent in October and closed Thursday at $7.62 1/2 a share, down 12 1/2 cents, a level not seen since 1982.
The stock plunge was trigged by a rumor, denied by management, that Kmart was considering Chapter 11 bankruptcy reorganization.
Duff & Phelps Credit Rating Co. last Friday lowered its rating on about $2 billion of Kmart's long-term debt, further depressing the retailer's stock. Standard & Poor's and Moody's Investment Service have Kmart on a credit watch and may lower their ratings, too.
Wall Street is skeptical about chief executive Floyd Hall's recently announced plan to lure more customers with a front-of-the-store section offering low-cost, low-profit snacks, detergent and other consumables. Hall said testing showed many customers also ended up buying bigger-ticket items.
The company's earnings report Thursday attributed part of its losses to lower profit margins. In the quarter Kmart's gross margin was down to 21.2 percent from 24.4 percent a year ago, squeezed by discounted sales of discontinued merchandise.
``To some extent there's an overreaction to any bit of bad news with Kmart,'' said Michael Zucker, who watches the retailer for an institutional shareholder, the Union of Needletrades, Industrial and Textile Employees.
``They've been down so long that everything tends to look bad.''
Indeed, Kmart's troubles have been growing for years. Its former management was criticized for letting the core discount stores slide, while competitors such as Wal-Mart and Target grabbed market share.
The board replaced chairman and CEO Joseph Antonini in June with Hall, a former Target chief executive, who continued the store closures and layoffs started by his predecessor. Kmart closed 207 stores this year, following 121 in 1994. About 25,000 employees were let go.
But Wall Street is still waiting for some signs of a turnaround
``This originally was the quarter where I think most of us expected the company to show an increase in profit,'' Joseph Ronning of Brown Brothers Harriman in New York said Monday in anticipation of the loss reported Thursday.
``The sales figures they have been generating have been respectable in today's market, but they've been at the cost of decreased profit margins.''
Analyst Wayne Hood of Prudential Securities Inc. in Atlanta said he was waiting until the first-quarter results are in next spring for any concrete signs of a turnaround.
The most pressing question is whether the credit rating agencies will wait that long, he said.
If Kmart's credit rating were to fall to junk-bond status, it would trigger ``put back'' provisions on $681 million of Kmart's real-estate debt, which could require the company to buy back its bonds immediately.
If more than $100 million of that debt were put back, Kmart's bankers also could demand that it immediately repay outstanding loans under its lines of credit.
Others are more optimistic about the retailer's chances for survival.
``The change that they are making in their merchandise mix is in the direction of lower-margin items, what they call high velocity items, like food, greeting cards and so forth,'' Petrie said. ``The overall strategy is a good one. It recognizes the major strengths of Kmart.''
One is its store locations. ``A lot of good suburban intersections are occupied by Kmart,'' said retailing analyst Ron Petrie of Roney & Co. in Detroit. Another strength is the tremendous buying power Kmart has because of its size.
by CNB