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Vendors Stand Behind Kmart’s $2B Bailout

Vendors generally lauded Kmart’s decision last week to seek Chapter 11 bankruptcy protection and breathed a sigh of relief after it secured a $2 billion debtor-in-possession line of credit from Credit Suisse First Boston, Fleet Retail Finance, General Electric Capital and JPMorgan Chase Bank.

Nevertheless, given the daunting challenges that remain for the nation’s No. 2 discount chain, their optimism over the outcome of the largest retail bankruptcy in history was guarded.

As a Kodak spokesman noted, “We remain committed to Kmart through [its] restructuring. [Kmart is] still a valued customer. We do not expect this to have a material effect on Kodak, but we are placing products already shipped to Kmart on a ‘doubtful accounts’ status, reflecting the uncertainty of their situation.”

Recoton says Kmart owes it about $6.9 million as of Jan. 22, but $2 million of it will be covered by an insurance policy. Sales to Kmart represent about 3 percent of Recoton’s total sales for 2001. Bob Borchardt, chairman, president and CEO of Recoton, said his company sells to more than 1,000 retail customers “thus limiting our financial exposure in situations like this.”

While wishing Kmart will successfully deal with “its challenges,” Borchardt added that the filing “will not have a long-term impact on Recoton’s profitability.”

Likewise, Royal Appliance, maker of Dirt Devil floor care products, has “adequately reserved for any uncollectable amounts relating to our Kmart receivables,” said president/CEO Mike Merriman, although the bankruptcy may still negatively impact its first-quarter results.

Similarly, music distributor Handleman, which counts on Kmart for 35 percent of its total revenue and is owed $63.6 million by the chain, said its third-quarter results would likely be hurt by the bankruptcy. Offered CEO Stephen Strome, “We’re working closely with Kmart to do whatever is needed to help them accomplish their objectives…We will make decisions that reflect our support of Kmart in addition to ensuring our company’s ongoing performance. As Kmart’s plans are announced, we will support them in their efforts to return to profitability.”

Harder hit was Rayovac, which does 6.5 percent of its total business with Kmart and whose first-quarter earnings were virtually “wiped out” by the filing, said chairman/CEO Dave Jones.

According to Tony Mirabelli, senior VP for Cobra, “Kmart will continue to be a very important customer to us. It’s unfortunate that it had to file as it has, but at the moment, the biggest problem we have is that we don’t have any other information from them regarding the next steps. So its difficult to say anything other than we hope to continue to work with them.”

The chain, which ranked 10th on TWICE’s Top 100 CE Retail Registry with $2.6 billion in electronics sales in 2000, said last week that it will reorganize on a “fast-track basis” with the goal of emerging from bankruptcy by 2003. At least for the short term, all 2,114 Kmart stores will remain open, its return policies will remain in effect, and the company’s credit cards, checks, gift certificates and store credits will be honored.

What’s more, its recently announced plans to revamp its electronics departments and expand the CE product mix appear unchanged. Said Cobra’s Mirabelli, “Kmart had started to restructure its [CE] merchandising and planograms and we are actively working with them on this.”

In announcing the filing, Kmart’s embattled CEO Charles Conaway said, “We are committed and determined to complete our reorganization as quickly and as smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future.”

According to Kmart, the filing was prompted by a decimated cash flow following a dismal fourth quarter; the downgrading of its bonds to junk status; and the loss of supplier confidence. Chief among the latter was Fleming, Kmart’s sole grocery supplier, which had halted deliveries after the retailer missed a weekly payment, but has since resumed shipments.

Martha Stewart’s private label home fashions line — which is considered key to Kmart’s survival — is owed $13 million, but that bill palls by comparison to those of Kmart’s top unsecured creditors, which include Buena Vista Home Video ($56,275,198), Nintendo of America ($44,913,692), Mattel Toys ($44,120,598) and Twentieth Century Fox Home Entertainment ($34,219,742).

Kmart board member James Adamson, who succeeded Conaway this month as chairman, noted that vendors would need to resume normal trade terms and full merchandise shipments within the first 60 days of the reorganization case in order to receive a second lien on Kmart’s collateral for their post-petition accounts payable.

Analysts are uncertain about Kmart’s future, citing its ill-defined place in the discount pantheon, the superior execution of chief rivals Wal-Mart and Target, and the need to close at least a quarter of its stores.

What impact would store closures have on the CE industry? According to the arithmetic of Aram Rubinson, a retail analyst with UBS Warburg, shutting even 400 units would be roughly equivalent to losing 58 Best Buy and Circuit City locations, based on Kmart’s 4,044-square-foot CE departments. The major beneficiaries, he suggests, would be CE specialty chains, although much of the lost market share may ultimately be absorbed by the hundreds of new Wal-Mart and Target locations planned for this year and next.

Kmart said it would continue to rebuild and reposition the chain by closing unprofitable or under-performing stores, and terminating money-losing sub-leases, and by reducing annual expenses an additional $350 million by cutting staff, consolidating offices and “other actions.”