Kmart Corp. stock fell 13% to a 30-year low Wednesday after worries that its dismal holiday sales could push the nation's second-largest discount chain closer to bankruptcy.
The plunge was another reflection of the mounting troubles facing Kmart, which continues to be dogged by dirty stores, poor inventory controls, slow apparel sales and increased competition. The Troy, Mich.-based chain's same-store sales declined in October and November, falling below the company's reduced expectations, despite the company's prominent position in the discount sector--one of the hottest retailing groups since the Sept. 11 terrorist attacks.
Kmart officials, however, dismissed suggestions of a bankruptcy filing, saying the firm has plenty of financial resources and is carrying out a turnaround plan.
Wednesday's sell-off began after the release of a report by Prudential Securities analyst Wayne Hood, who took the unusual step of warning about a possible Chapter 11 filing if Kmart fails to boost sales in the first half of 2002.
Hood also issued a "sell" rating on the stock--another rarity among Wall Street analysts.
Kmart shares fell 72 cents to close at $4.74 on the New York Stock Exchange after trading as low as $4.48 during the day.
In his report, Hood joined other analysts who had cut estimates of Kmart's fourth-quarter earnings per share by more than half, from 42 cents a share to 20 cents. The new numbers for the fourth quarter would mean a loss for the year of 12 cents a share, as opposed to earlier estimates of a profit of 15 cents a share.
"The next six months represent a critical time for Kmart and we would not be surprised if the company were to file Chapter 11 bankruptcy if trends do not improve," Hood wrote. "Indeed, we are not sure why management wouldn't file" in order to make dramatic changes, walk away from underperforming assets and liabilities and make itself more attractive to the market or an acquirer.
Kmart spokesman Jack Ferry dismissed suggestions of bankruptcy, saying the company's tough time in the third and fourth quarters comes from working on a revitalization plan against the backdrop of a slower economy.
"Kmart has sufficient funds and available lines of credit to continue to carry out its strategies," Ferry said. "What we're doing here is for long-term benefits and it's clearly a marathon and not a sprint."
Los Angeles billionaire supermarket magnate Ronald W. Burkle, who a year ago announced he had bought a 6% stake in Kmart, said the discounter has been focusing too much on competing with the world's biggest retailer, Wal-Mart Stores Inc., and not enough on smaller drugstores and supermarkets.
Burkle said he still holds his stake, but has "collared" his shares, a complex financial maneuver to limit his risk.
"There's a real opportunity in different regions where there's no strong operator, and that was the business plan I said I was willing to buy stock into," said Burkle, who owned the Ralphs and Food4Less supermarket chains before selling them to Kroger Co. in 1999. "And I think they have done that, but they have not gotten the Wal-Mart out of them."
Kmart's avenue for competition with those regional sellers, its newer supercenters, is what is most at risk from the company's dwindling cash flow. In addition to slower sales, analysts say, Kmart has been plagued by inventory problems, ending the third quarter with 5.6% more inventory than a year ago.
In a November call with analysts, Kmart Chairman Chuck Conaway described efforts to fix the antiquated inventory control system as critical to the company's survival. Kmart is spending more than $1 billion to renovate inventory systems that leave the chain "woefully uncompetitive" on costs, Conaway said.
But despite recent improvements, the chain remains "significantly behind our nearest competitor," he said.
"The last several months have been littered with one negative announcement after the next and that has weighed on the market," said Daniel Binder, an analyst with Buckingham Research Group in New York. "There should be concerns with liquidity but I don't think there's a crisis yet, that would take another three quarters of negative 2% to 3% sales comparisons."
Burkle said that although the company has a tougher road ahead, bankruptcy is unlikely.
"I don't think they've ever had enough money to build the supercenters out the way they should and it's going to be harder to do now," he said. "But in 1995, there were those same rumors [about bankruptcy] and those turned out to be wrong. At the end of the day, I think they'll be in good shape."
Times staff writer Greg Johnson contributed to this report.