Detroit, MI, May 6--Kmart Corp.'s long-awaited day is at hand. The discounter is scheduled to emerge today from just more than 15 months of Chapter 11 bankruptcy protection with 600 fewer stores, new leadership and a $2 billion loan.
Investor Edward Lampert's company, ESL Investments, is converting another $2 billion in financial claims against Kmart into stock and will own a 49 percent stake in the retailer.
“The plan is to provide that a lot of the debts go away, to get as fresh a start as possible,'' said bankruptcy, benefits and labor attorney Lowell Peterson of New York-based Meyer, Suozzi and Klein. ``The idea is that it's a new company financially.''
But, Peterson said, as a well-known retailer, Kmart does benefit from brand recognition and a customer base that has long shopped in its stores.
``Really, the new stuff is that they don't owe people as much money,'' he said.
Troy-based Kmart entered bankruptcy Jan. 22, 2002 after a poor holiday selling season and a reputation for having cluttered stores and items out of stock. It had 2,114 stores at the time, but now has about 1,500.
It plans to emerge as the ``store of the neighborhood,'' which means giving store managers more power to decide what items their stores should carry, and a destination for exclusive brands such as Martha Stewart Everyday and Joe Boxer.
The company has rebuilt its corporate structure to streamline purchasing and ensure stores are stocked with popular items. Only 15 employees are now authorized to give final approval to orders, down from 220.
Kmart spokesman Jack Ferry said the company has not said publicly what its debt level will be after leaving bankruptcy. He said the company would make that information public in government filings afterward.
Julian Day was named president after the company's bankruptcy last year and added the chief executive title in January, replacing James B. Adamson, who serves as non-executive chairman through the end of Kmart's Chapter 11 case.
Adamson, a Kmart board member since 1996, replaced Charles C. Conaway as chief executive in March 2002.
Bankruptcy experts say Kmart shoppers should not expect to find an immediate overhaul.
``Don't expect overnight miracles when it comes to inventory and selection,'' said Anthony Sabino, associate professor of law at the Tobin College of Business at St. John's University in New York.
He and others say they are concerned that Kmart is not coming out of bankruptcy a fundamentally changed company.
``I still don't see a cogent business plan. It's a company in flux,'' Sabino said. ``I don't think Kmart knows what they want to be.''
Still, Sabino said unlike major retail bankruptcies of days past, Kmart could not afford to languish in Chapter 11, so it had nearly no choice but to emerge quickly, despite being faced with a weak economy and tougher competition from Wal-Mart Stores Inc. and Target Corp.
``The idea now is that if you're not going to get out of Chapter 11 on your own, we're going to flip this into a Chapter 7 and liquidate you,'' Sabino said.
This year is expected to be a transition year for Kmart, with a profit not projected until 2004, under the plan of reorganization approved April 21 by a federal bankruptcy judge. The company reported a loss of $3.22 billion for fiscal 2002.
Many say Kmart's success or failure in the coming year likely will foreshadow the company's future and serve as a warning that emerging from bankruptcy protection is only the beginning.
``The exit from bankruptcy is not the entrance to paradise,'' said Darrell Rigby, who heads Bain & Co.'s worldwide retail practice.
``Unless you've really taken significant steps to fix the problems, it's just a temporary deal.''
