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graphic January 10, 2002: 11:02 a.m. ET

Troubled Kmart warns on 4Q, says it is reviewing liquidity and cash position.
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  • Discounters post better December sales than other retailers - Jan. 10, 2002
  • Prudential rates Kmart a 'sell' - Jan. 2, 2002
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  • Kmart
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    NEW YORK (CNN/Money) - Kmart Corp. said Thursday it is reviewing its liquidity and future business plans as the struggling discount chain warned that it does not expect to meet Wall Street's fourth-quarter earnings estimates of 32 cents a share.

    Troy, Mich.-based Kmart (KM: Research, Estimates), whose stock was downgraded last week by Prudential Securities to a rare "sell" rating, said it continues to "review its current and prospective liquidity position and business plan for the 2002 and 2003 fiscal years, and in that regard, is in discussions with its lenders regarding its existing and possible supplemental financing facilities."

    The company also posted a 1 percent drop in December sales at stores open at least a year, a key gauge known as same-store sales.

    Kmart's shares fell 28 cents to $4.52 in early trading Thursday. The stock is far off its 52-week high of $13.55.

    In downgrading the stock, Prudential said Kmart, which faces a stodgy image with consumers and fierce competition from Wal-Mart (WMT: Research, Estimates), could face bankruptcy if business does not improve.

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    Shelly Hale, retail analyst at Banc of America Securities, said that with annual sales of $35 billion to $37 billion despite its troubles, Kmart is not going anywhere anytime soon. If it does file for bankruptcy, it will likely be a voluntary move giving the company breathing room to close unprofitable stores, making it a more wieldy business, she said.

    "They should probably be a $20 billion company with 800 stores as opposed to a $35 [billion] to $37 billion company with 2,000 stores. They're very inefficient," Hale said.

    While she thinks Kmart is doing good things in terms of trying to streamline and cut costs, she believes it is making a mistake in trying to go head-to-head on pricing with Wal-Mart, the world's biggest retailer.

    "I think they've tried to go after the customer with pricing, and you can't compete against Wal-Mart in pricing. They will kill you every time," Hale said.

    Kmart refuted the Prudential report last week, saying it has enough cash to continue operating.

    "The press release speaks for itself. At this time we're reviewing our liquidity needs," Kmart spokesman Jack Ferry told CNN/Money.com Thursday.

    Some Wall Street analysts had feared that Prudential's downgrade and mention of bankruptcy could prompt some vendors to tighten up their payment arrangements with Kmart, but Ferry said Thursday that all payments to vendors are current and that the company is in "open communication" with them.

    If it files for bankruptcy protection, Kmart would be the latest in a string of discount chains to do so in the last few years. Caldor, Bradlees and Montgomery Ward all declared bankruptcy and subsequently closed their doors in recent times as they struggled with increasing pressure from Wal-Mart and moderately priced department stores such as Kohl's (KSS: up $0.34 to $69.35, Research, Estimates). Ames Department Stores filed for bankruptcy protection earlier this year, but it continues to operate.

    Browse retail stocks here

    Other analysts have disagreed with Prudential's prediction of a Kmart bankruptcy, citing the company's knack for survival through hard times.

    "I think they will continue to try to work within the current structure to weed out all of the unproductive stores," Hale said.

    Kmart was founded in 1899 by Sebastian Spering Kresge, who opened the company's first store in downtown Detroit. The company was incorporated in 1912 in Delaware as S.S. Kresge Co. and began trading as a public company on the New York Stock Exchange in 1918. In 1962 the company assumed the Kmart name and the big-box store format familiar to today's consumers. graphic

      RELATED STORIES

    Discounters post better December sales than other retailers - Jan. 10, 2002

    Prudential rates Kmart a 'sell' - Jan. 2, 2002

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