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Kmart Wins Ruling on Penske

April 08, 2002|MELINDA FULMER | TIMES STAFF WRITER

Bankrupt retailer Kmart Corp. won a temporary restraining order preventing Penske Auto Centers from shuttering its 563 service centers over the weekend. The two companies are to return to court today to determine whether the order will be made permanent.

Penske Auto Centers, which is partly owned by Kmart, had informed the Troy, Mich.-based retailer on Friday that it would shut down all of its centers beginning Saturday. But U.S. Bankruptcy Judge Susan Pierson Sonderby in Chicago issued a last-minute stay on Saturday preventing Penske from taking any action until a hearing today.

Although the auto centers were not among the retailer's primary draws, analysts say the closures would almost certainly inflict further damage on Kmart and its reputation at a time when it is struggling to survive alongside fellow discounters Target and Wal-Mart.

"When you look at a Kmart, the last thing you want to do is see parts of the store shut down," said Richard Giss, a partner at Deloitte & Touche Retail Service Group. That sends the signal "that the whole place is getting ready to shut down."

Kmart filed for Chapter 11 Bankruptcy Court protection in January, the largest filing for a national retailer. Its reorganization has taken a toll on Penske, as it has on other suppliers. Penske said Kmart last month defaulted on a $5-million payment owed to Penske when Penske was forced to shutter 63 auto center locations when Kmart announced a round of store closings. The centers do everything from change oil to sell batteries.

Still, Penske Chief Executive Jim Wheat said the auto centers still open were "strong and performing well."

Kmart said Saturday in a statement that it is "in discussions with Penske regarding a mutually acceptable plan for the future of the auto centers that would protect the interests of the centers' customers."

Senior Penske officials, contacted late Saturday, called Kmart's statement misleading.

Penske Chairman Richard Peters said that during a March 27 meeting, Kmart Chief Operating Officer Julian Day "informed us that Kmart had determined through their research that the auto centers provided no value to its core business."

"Kmart was therefore unwilling to provide any support to PAC and agreed that the best course of action was to close PAC," Peters said in a statement.

Kmart officials were not available for comment. Kmart owns 36% of Penske Auto Centers; the rest is controlled by a unit of Troy, Mich.-based Penske Corp., which purchased the auto-service business from Kmart in 1995.

Kmart said Penske is just one of a number of companies hurt by Kmart's bankruptcy.

Dorel Industries, a maker of children's car seats, took a one-time charge of 5 cents per share in its last quarter from its Kmart losses, and Martha Stewart Living Omnimedia Inc. has reduced its profit projections for 2002 because of Kmart's store closures.

But Kmart won Bankruptcy Court approval to pay certain suppliers, including Martha Stewart, to continue shipments of merchandise the retailer deemed essential.

Kmart's stock closed at $1.28, down 9 cents, in New York Stock Exchange trading Friday.

Times wire services were used in compiling this report.

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