Kmart Corporation Reports 2001 Fiscal Year Results; Restatement of Interim Periods

Kmart Corporation (NYSE: KM) announced today the financial results for its 2001 fiscal year, which ended on January 30, 2002 -- eight days after its voluntary Chapter 11 filing. Kmart also announced a restatement of its unaudited fiscal 2001 quarterly financial data, which reflects the results of the Company's previously announced investigation of accounting matters and the new management team's review of Kmart's accounting policies and methods.

Fiscal 2001 Annual Results

For the 52-week fiscal year ended January 30, 2002, Kmart reported a loss of $2.42 billion, or $4.89 per share, versus a loss of $244 million, or $0.48 per share for the 53-week fiscal year ended January 31, 2001. Excluding non- comparable items, income from reorganization items and results of discontinued operations, the Company's net loss was $987 million, or $2.00 per share, in the 2001 fiscal year versus net income of $219 million, or $0.47 per share, in the 2000 fiscal year.

Net sales for the 52-week period ended January 30, 2002 were $36.15 billion, a decrease of 2.4% from $37.03 billion for the 53-week period ended January 31, 2001. On a same-store basis, sales were essentially flat in 2001, declining 0.1 percent from the previous fiscal year.

James B. Adamson, Chairman and Chief Executive Officer of Kmart, said, "These results reconfirm the significant difficulties Kmart experienced last year, including unsuccessful sales and marketing initiatives, an erosion in supplier confidence, and below-plan sales and earnings performance in the fourth quarter -- all of which were factors in the decision to file for Chapter 11 bankruptcy protection. We are moving aggressively to address these challenges."

The decrease in total and same-store sales in 2001 was due primarily to fewer sales transactions resulting from reduced promotional activity and increased competition in the discount retail industry, the deflationary effect of the BlueLight Always program, in which prices were lowered on more than 30,000 high-frequency items, and the effect of prior-year clearance sales of discontinued merchandise. In addition, total sales decreased due to an additional week of sales in fiscal 2000 and the net effect of store openings and closings.

Excluding non-comparable items, gross margin as a percentage of sales was 17.4% in fiscal 2001, compared with 20.9% in 2000. The decline in gross margin rate was driven by a 13.4% rate in the fourth quarter, attributable to the pricing effects of the BlueLight Always program and higher markdowns of seasonal apparel due to unseasonably warm weather. Additionally, in fiscal 2001 Kmart experienced a decrease in vendor allowances of approximately $150 million, primarily due to the erosion in supplier confidence brought on by the events leading up to the Company's bankruptcy filing, an increase in sales of lower-margin food and consumables, an adjustment to inventory for LIFO due to lower inventory levels, partially offset by a decrease in clearance sales in 2001 as compared to 2000 and lower distribution costs under Kmart's arrangement with Fleming.

The increase in Selling, General and Administrative expenses (SG&A) was due primarily to increased expenses for general liability and workers compensation claims, a decrease in recoveries of co-op advertising costs, and increases in employee compensation and utility rates, partially offset by reductions in advertising expenses.

Adamson said, "Last year's financial performance was clearly unacceptable, and we are in the process of implementing a number of initiatives aimed at stabilizing Kmart's operations. Later this year we plan to unveil a new strategic business plan to reposition the Company. In the meantime, we are continuing to place a strong emphasis on reducing costs and generating positive cash flow."

As of May 1, 2002, Kmart had approximately $1.1 billion in available cash and approximately $1.6 billion available under its debtor-in-possession credit facility.

Reconciliation of net loss

The following unaudited table reconciles net loss as reported to net (loss) income adjusted for non-comparable items, income from reorganization items and discontinued operations for the fiscal annual periods ended January 30, 2002 and January 31, 2001, respectively:

                                                     52-weeks      53-weeks
                                                      Ended         Ended
  ($ Millions, except per share amounts)           January 30,   January 31,
                                                       2002          2001

  Net loss                                          $(2,418)        $(244)

  Non-comparable items:
     Long-lived asset impairment charge                 979             -
     Charge for supply chain restructuring              163             -
     Charge for                            97             -
     Charge for employee severance and VERP              23             -
     Strategic actions charge                             -           728
  Total non-comparable items                          1,262           728
  Tax benefit                                             -          (265)
  Total non-comparable items, net of tax              1,262           463

  Reorganization items                                 (184)            -
  Discontinued operations                              (169)            -
  FAS 109 valuation allowance (net of portion
   attributable to non-comparable items,
   reorganization items and
   discontinued operations)                             522             -

  Net (loss) income adjusted for
   non-comparable items, reorganization
   items and discontinued operations                  $(987)         $219

  EPS as reported                                    $(4.89)       $(0.48)
  EPS adjusted for non-comparable items,
   reorganization items and discontinued operations  $(2.00)        $0.47

  Basic and diluted weighted average shares
   (in millions)                                      494.1         482.8

During the 2001 fiscal year, the Company recorded a total of $1.26 billion in non-comparable charges, income of $184 million for reorganization items and income from discontinued operations of $169 million. As previously reported, the Company recorded a $23 million charge ($15 million after-tax) in the first quarter for employee severance and a Voluntary Early Retirement Program (VERP), charges of $92 million ($73 million after-tax) and $5 million ($3 million after-tax) in the second and third quarters, respectively, for and a $163 million charge ($94 million after-tax) in the third quarter to restructure certain aspects of supply chain operations. In the fourth quarter, the Company recognized income from discontinued operations of $169 million primarily reflecting a reduction in lease obligations for stores previously closed and recorded a non-cash charge of $979 million for the impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In addition, the Company realized gains from reorganization activities of $184 million primarily for the reduction in general liability reserves and lease obligations for stores the Company had closed in prior years, partially offset by expenses for professional service and advisory fees. The Company also recorded a valuation allowance of $958 million on net deferred tax assets in accordance with SFAS No. 109, "Accounting for Income Taxes."

The valuation allowance charge eliminated the tax benefits for non- comparable charges recorded in the first three quarters. Accordingly, on a full-year basis, all fiscal 2001 non-comparable items listed in the table above include no tax benefit.

In fiscal 2000, the Company recorded a non-comparable charge of $728 million ($463 million, after-tax) for a series of strategic actions aimed at strengthening financial performance.

Restatement of Fiscal 2001 Unaudited Quarterly Financial Data

Based on the results of the Company's previously announced investigation of accounting matters conducted under the supervision of the Audit Committee of the Board of Directors, as well as the new management team's review of Kmart's accounting policies and methods, Kmart concluded that (1) an adjustment should be made with respect to an up-front payment in a single vendor transaction that more appropriately should have been deferred and recognized over the life of the contract, and (2) the recording of additional general liability reserves in the fourth quarter was more appropriately designated as a second quarter event. Accordingly, adjustments were made for such transactions, including restatements of previously reported unaudited quarterly financial statements for fiscal 2001 as follows:

* The first adjustment increased Cost of sales, buying and occupancy, resulting in a net reduction to operating results in the second quarter of $42 million ($28 million, after tax) or $0.06 per share, and an increase in third quarter operating results of $15 million ($10 million, after tax) or $0.02 per share.

* The second adjustment increased general liability reserves in the second quarter, rather than the fourth quarter, by approximately $167 million ($112 million, after tax), or $0.23 per share through a charge to SG&A.

Additionally, given the Company's bankruptcy filing, and the increased uncertainty and corresponding difficulty in reliably estimating future vendor allowances, Kmart's new management team reviewed the accounting for allowances and concluded that it would be preferable to change the Company's accounting method for interim recognition of cost recoveries from allowances. While this change in method was adopted in the fourth quarter of fiscal 2001, generally accepted accounting principles require the restatement of the first three quarters of fiscal 2001 to reflect this change.

Vendor allowances and rebates are periodic payments received by the Company from vendors in the form of volume or other purchase discounts. This change in methodology does not affect the results that otherwise would have been reported for the full fiscal year, but rather affects the interim recognition of allowances during the year.

Under the new methodology, Kmart will recognize a cost recovery from an allowance only when a formal agreement for such amount is obtained and only to the extent Kmart has fulfilled its performance obligations under the agreement. Previously, Kmart had recorded vendor allowances and rebates during each of the first three quarters based on an estimated annual level of rebates and allowances it expected to receive during the year. These estimates were based on Kmart's historical experience and current understandings with our vendors, and were supplemented by vendor allowances and rebates obtained that were not contemplated in the Company's original estimates. Significant activity occurs in the fourth quarter to finalize outstanding agreements and to collect allowances. Accordingly, under either method, all allowances recognized as of the end of the year are supported by written agreements signed by the vendors.

The following table summarizes unaudited quarterly financial information as previously reported for the first three quarters of fiscal 2001 and as restated to reflect the two accounting adjustments and the change in accounting method for allowances. Embedded in the accounting change that gives effect to the change in interim financial reporting for allowances is an adjustment for an indeterminate amount of supplemental or "incremental" vendor allowances that were initially recorded in the first three quarters prior to having been documented, or otherwise deemed appropriate, pursuant to Kmart's historical policy. Kmart has determined that it is not practical to determine the impact on prior quarters. It should be noted, however, that the restated interim information reflects such allowances only to the extent they are supported by formal agreements or otherwise deemed appropriate in the quarter recognized.

                                                  2001 Fiscal Quarter
                                               First      Second      Third
  Net Loss Previously Reported                 $(25)       $(95)     $(224)
      Adjustment for Single Vendor
       Transaction                                          (42)        15
      General Liability Reserve Adjustment                 (167)
      Accounting Change for Vendor
       Allowances                              (311)       (211)       (32)
     Income Tax Benefit                         103         138          6
  Net Loss as Restated                        $(233)      $(377)     $(235)

  Net Loss Per Share:
      As Previously Reported                 $(0.05)     $(0.19)    $(0.45)
      As Restated                            $(0.48)     $(0.77)    $(0.47)

Financial statements for prior fiscal years were not impacted by the accounting adjustments or the change in accounting method.

Kmart expects to file amended Quarterly Reports on Form 10-Q/A for the first three quarters of the 2001 fiscal year as soon as practicable.

The Company will also amend and re-file Monthly Operating Reports with the Bankruptcy Court and the Securities and Exchange Commission (SEC) to reflect the change in accounting method as soon as practicable. These amended filings will also include monthly balance sheets, which were omitted from previous filings, pending completion of the audit of the Company's fiscal 2001 financial statements.

As previously announced, the Company began its investigation of accounting and other matters following receipt in January 2002 of an anonymous letter from certain individuals purporting to be Kmart employees. Since then, Kmart has been provided with copies of additional anonymous letters sent to the SEC, Kmart's auditors, directors and legal counsel expressing concern with respect to various matters. The letters were referred to the Audit Committee of Kmart's Board of Directors, which engaged outside counsel to review and investigate the matters set forth in the letters. This review, including a review of the Company's stewardship under its previous management, is continuing and is expected to be completed by September 2002. Kmart is cooperating with the SEC and the U.S. Attorney's Office for the Eastern District of Michigan with respect to their investigations of these issues.

                            KMART CORPORATION
             (Dollars in millions, except per share amounts)

                                                     52-weeks     53-weeks
                                                      Ended         Ended
                                                   January 30,   January 31,
                                                       2002          2001

   Sales                                             $36,151       $37,028
   Cost of sales, buying and occupancy                29,936        29,658
     Gross margin                                      6,215         7,370
   Selling, general and administrative expenses        7,588         7,402
     Equity loss in unconsolidated subsidiaries            -           (13)
     Restructuring, impairment and other charges       1,099             -
     Continuing loss before interest, income taxes,
      reorganization items and dividends on
      convertible preferred securities of
      subsidiary trust                                (2,472)          (45)
     Interest expense, net
      (contractual interest for fiscal 2001 was $352)    344           287

     Reorganization items                               (184)            -

     Income tax benefit                                 (115)         (134)

     Dividends on convertible preferred
      securities of subsidiary trust,
      net of income taxes ($0 and $25)
      (contractual dividend for fiscal
       year 2001 was $72)                                 70            46

     Net loss from continuing operations              (2,587)         (244)
     Discontinued operations,
      net of income taxes ($0)                           169             -

     Net loss                                        $(2,418)        $(244)

  Basic and diluted loss per common share:
  Net loss from continuing operations                 $(5.23)       $(0.48)
  Discontinued operations                               0.34             -
  Net loss                                            $(4.89)       $(0.48)

  Basic and diluted weighted
   average shares (millions)                           494.1         482.8

                            KMART CORPORATION
                       CONSOLIDATED BALANCE SHEETS
                          (Dollars in millions)

                                                    January 30,  January 31,
                                                       2002          2001
  Current Assets:
   Cash and cash equivalents                          $1,245          $401
   Merchandise inventories                             5,822         6,412
   Other current assets                                  817           939
  Total current assets                                 7,884         7,752

  Property and equipment, net                          6,161         6,557
  Other assets and deferred charges                      253           523
  Total Assets                                       $14,298       $14,832

  Current Liabilities:
     Long-term debt due within one year                  $ -           $68
     Accounts payable                                    103         2,159
     Accrued payroll and other liabilities               378         1,587
     Taxes other than income taxes                       143           187
  Total current liabilities                              624         4,001

     Long-term debt and notes payable                      -         2,084
     Debtor-in-possession credit facility                330             -
     Capital lease obligations                           857           943
     Other long-term liabilities                          79           834
  Total liabilities not subject to compromise          1,890         7,862

  Total liabilities subject to compromise              8,060             -

  Company obligated mandatorily redeemable
   convertible preferred securities of a
   subsidiary trust holding solely 7 3/4%
   convertible junior subordinated debentures
   of Kmart (redemption value $898 and $898,
   respectively)                                         889           887
  Common stock, $1 par value, 1,500,000,000 shares
   authorized; 503,294,515 and 486,509,736 shares
   outstanding, respectively                             503           487
  Capital in excess of par value                       1,695         1,578
  Retained earnings                                    1,261         4,018
  Total Liabilities and Shareholders' Equity         $14,298       $14,832

                            KMART CORPORATION
                          (Dollars in millions)

                                                      52-weeks   53-weeks
                                                        Ended      Ended
                                                    January 30,  January 31,
                                                         2002       2001
       Net loss from continuing operations            $(2,587)     $(244)
       Adjustments to reconcile net loss from
        continuing operations to net cash
        provided by operating activities:
          Restructuring, impairments and other
           charges                                      1,262        728
          Reorganization items                           (184)         -
          Depreciation and amortization                   824        777
          Equity loss in unconsolidated subsidiaries        -         13
          Dividends received from Meldisco                 51         44
       Decrease in inventories                            596        324
       Increase (decrease) in accounts payable            996       (145)
       Deferred income taxes and taxes payable            (55)      (204)
       Changes in other assets                            222         48
       Changes in other liabilities                       102        (10)
       Cash used for store closings                      (128)      (102)
       Net cash provided by continuing operations       1,099      1,229
       Net cash used for discontinued operations         (102)      (115)
  Net cash provided by operating activities               997      1,114

  Net cash used for reorganization items                   (6)         -

       Capital expenditures                            (1,456)    (1,089)
       Investment in                        (45)       (55)
  Net cash used for investing activities               (1,501)    (1,144)

       Proceeds from issuance of debt                   1,824        400
       Debt issuance cost                                 (49)        (3)
       Issuance of common shares                           56         53
       Purchase of convertible preferred securities
        of subsidiary trust                                 -        (84)
       Purchase of common shares                            -        (55)
       Payments on debt                                  (320)       (73)
       Payments on capital lease obligations              (85)       (78)
       Payments of dividends on preferred
        securities of subsidiary trust                    (72)       (73)
  Net cash provided by financing activities             1,354         87

  Net change in cash and cash equivalents                 844         57
  Cash and cash equivalents, beginning of year            401        344
  Cash and cash equivalents, end of period             $1,245       $401

Kmart Corporation is a $36 billion company that serves America with more than 2,100 Kmart and Kmart SuperCenter retail outlets and through its e-commerce shopping site, .

Cautionary Statement Regarding Forward-looking Information

The foregoing, as well as other statements made by Kmart, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, when made, Kmart's current views with respect to current events and financial performance. Statements, other than those based on historical facts, which address activities, events or developments that we expect or anticipate may occur in the future are forward- looking statements, which are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Such forward- looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to Kmart operations and business environment which may cause the actual results of Kmart to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following:

  General Factors
  *  general economic conditions,
  *  weather conditions, including those which affect buying patterns of our
  *  changes in consumer spending and our ability to anticipate buying
     patterns and implement appropriate inventory strategies,
  *  competitive pressures and other third party actions,
  *  ability to timely acquire desired goods and/or fulfill labor needs at
     planned costs,
  *  our ability to successfully implement business strategies and otherwise
     execute planned changes in various aspects of the business,
  *  regulatory and legal developments,
  *  our ability to attract, motivate and/or retain key executives and
  *  our ability to attract and retain customers,
  *  other factors affecting business beyond our control,

  Bankruptcy Related Factors
  *  our ability to continue as a going concern,
  *  our ability to operate pursuant to the terms of the DIP Credit
  *  our ability to obtain court approval with respect to motions in the
     Chapter 11 proceeding prosecuted by it from time to time,
  *  our ability to develop, prosecute, confirm and consummate one or more
     plans of reorganization with respect to the Chapter 11 cases,
  *  risks associated with third parties seeking and obtaining court
     approval to terminate or shorten the exclusivity period that we have to
     propose and confirm one or more plans of reorganization, for the
     appointment of a Chapter 11 trustee or to convert the cases to Chapter
     7 cases,
  *  our ability to obtain and maintain normal terms with vendors and
     service providers,
  *  our ability to maintain contracts that are critical to our operations,
  *  the potential adverse impact of the Chapter 11 cases on our liquidity
     or results of operations, and
  *  our ability to fund and execute our business plan.

Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated will be realized or that they will have the expected effects on our business or operations.

Similarly, these and other factors, including the terms of any reorganization plan ultimately confirmed, can affect the value of our various pre-petition liabilities, common stock and/or other equity securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. A plan of reorganization could result in holders of Kmart common stock receiving no value for their interests. Because of such possibilities, the value of the common stock is highly speculative. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.

Other risk factors are listed from time to time in the Company's SEC reports, including, but not limited to the annual report on Form 10-K for the year ended January 30, 2002. The forward-looking statements contained herein or otherwise that we make or are made in our behalf speak only as of the date of this report, or if not contained herein, as of the date when made, and we do not undertake to update these risk factors.


SOURCE: Kmart Corporation

Contact: Kmart Corporation Media Relations, +1-248-463-1021


© Transform SR Brands, LLC