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Kmart Emerges From Bankruptcy

By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, May 7, 2003; Page E01

Kmart Corp. emerged from bankruptcy protection yesterday amid a flurry of skepticism about whether it has the strategy and strength to beat back its rivals and regain its standing as a powerhouse in discount retailing.

The Troy, Mich.-based retailer, which was the largest U.S. retailer to seek shelter from creditors, has wiped out $6 billion in liabilities but is left with a third of the stores and a quarter of the employees it had before its January 2002 bankruptcy filing.

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The question now is whether the company can survive competition with the nation's top two discount chains, Wal-Mart Stores Inc. and Target Corp. Both expanded their store bases as Kmart retrenched.

"Kmart is having a very difficult time stabilizing and sustaining the business," said Burt P. Flickinger III, managing director of Strategic Resource Group in New York.

Kmart, which secured $2 billion in financing to emerge from bankruptcy, has a relatively new management team in place, headed by Julian C. Day, a former executive at Sears, Roebuck and Co. and Safeway Inc.

It also has a board of directors heavily influenced by ESL Investments Inc., a hedge fund firm owned by Connecticut multimillionaire Edward S. Lampert. ESL now holds a stake of more than 50 percent in Kmart and has four of its nine board seats.

Many industry experts questioned Kmart's timing in exiting bankruptcy as the retail sector appears shaken by a poor economy and a spooked consumer. They criticized the company for failing to craft a strategy that will lure customers away from Wal-Mart, which has mastered the art of rock-bottom pricing, at Kmart's expense.

If Kmart cannot lure a high volume of foot traffic in the next year or so, it may need to shed even more store leases or contracts with suppliers. Those actions become more expensive without bankruptcy court protection, said James V. McTevia, chairman of McTevia Associates Inc. in Detroit.

"They're coming out of bankruptcy a year too early," said McTevia, who thinks Kmart "will become a very minor player in the industry and eventually they will not be around."

Sheldon Grodsky, president of Grodsky Associates Inc., agrees that Kmart is not emerging from bankruptcy in very strong financial shape. But, he said, "bankruptcy is not the kind of house you want to move into permanently." He added: "It's like being a patient in a hospital bed; if you want to get stronger, you have to get up on your own two feet and get your body working again."

Steven Lipin, ESL's spokesman, said an end to bankruptcy means an end to paying advisers and other fees. ESL and Third Avenue Value Fund received about 33 million shares of Kmart's new stock.

"There's a window under which you can use the benefits of the bankruptcy court, but there's also a cost associated with staying in bankruptcy for too long," Lipin said.

Even in bankruptcy, Kmart made a stab at fixing its business by emphasizing exclusive brands -- most notably Martha Stewart Everyday and Joe Boxer. Last year, it launched television ads -- directed by moviemaker Spike Lee -- that poked fun at everyday living and featured its Disney line of clothes.

It has experimented with store layout and its logo, changing the logo from bright red to lime green at some stores. Last year, it improved the lighting in some stores. Employees uncluttered aisles, scrubbed floors and even scraped gum off sidewalks.

The company also announced new lines of clothing designed to appeal to African Americans and Latinos, who make up 32 percent of the retailer's consumer base.

Kmart's commitment to minority shoppers was one reason it agreed to open a store in Northeast Washington. But those plans were put on hold when the company filed for bankruptcy and remain in limbo.

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