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Kmart board meets
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January 15, 2002: 3:02 p.m. ET
Discount chain mulls options after credit downgrades, bankruptcy talk.
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NEW YORK (CNN/Money) - Kmart Corp.'s board of directors continued to meet Tuesday amid growing speculation about whether the nation's second-largest discount retailer would file for Chapter 11 bankruptcy protection in the face of credit downgrades and disappointing holiday sales.
Kmart spokesman Jack Ferry confirmed to CNNfn Tuesday that the board continued a regularly scheduled meeting Tuesday that convened the night before, but declined to discuss the agenda.
Kmart's (KM: down $0.37 to $2.47, Research, Estimates) shares fell more than 16 percent Tuesday to $2.38. That's after tumbling nearly 14 percent Monday.
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CNNfn's Amanda Lang reports on Kmart's troubles.
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A Chapter 11 bankruptcy filing gives a company protection from creditors while it continues operating and attempts to reorganize.
"Everything will depend on whether they can get an extension of their credit and possibly additional credit to tide them over," Kurt Barnard, president of Barnard's Retail Consulting Group, said. "If they don't get the credit, Chapter 11 (bankruptcy) is probably the only way out."
Kmart, which is trying to turn itself around under Chuck Conaway, who succeeded Floyd Hall as CEO just over a year ago, is struggling with fierce price competition from Wal-Mart Stores Inc., the world's biggest retailer, as it tries to pay off about $1.5 billion in corporate debt.
Part of that debt includes a $435 million credit facility due next November, analysts said.
In addition to considering a Chapter 11 filing, Kmart may close some of its 2,100 stores, analysts have said.
Competitive pressure has also been prodded along by the sluggish economy, which led consumers to turn to discount stores like Kmart, Wal-Mart and Target for bargain prices.
Banc of America Securities retail analyst Shelly Hale said last week that Kmart's problem is that it has tried to go head-to-head with Wal-Mart on pricing.
"They will kill you every time," she said.
Last week, Kmart posted a 1 percent drop in December sales at stores open at least a year, a key gauge known as same-store sales. That figure is significant since it reflects crucial holiday sales for what has been an especially strong season for discount chains.
At the same time, Kmart, which posted a $344 million net loss in the first nine months of 2001, said it is reviewing its liquidity and future business plans and that it does not expect to meet Wall Street's fourth-quarter earnings estimates of 32 cents a share.
That announcement came a week after Prudential Securities downgraded Kmart to a rare "sell" rating, and publicly raised the possibility of a bankruptcy filing for the first time.
Though some analysts believe a Chapter 11 filing is a possibility, several would consider it a pre-emptive move by the Troy, Mich.-based chain to access more financing and liquidity, including wiggle room to renegotiate the leases on underperforming stores.
At least three Wall Street analysts believe a filing unlikely, noting that vendors have not tightened terms on the company and that Kmart is not in any immediate danger of missing its loan payments.
The company said last week it's up to date in its vendor payments and Conaway has said the company has a minimum of $300 million in cash on hand, meaning that bankruptcy isn't necessarily a foregone conclusion.
Procter & Gamble (PG: up $0.89 to $79.59, Research, Estimates) spokeswoman Tami Jones said Kmart, its second-biggest customer next to Wal-Mart, is up to date and on time with all its payments, and that P&G has not modified the terms of their vending agreement.
"I really would be surprised if they filed. The part of the equation that is missing in a typical bankruptcy situation is that vendors are not clamping down on them," Robertson Stephens retail analyst Bill Dreher said. "Vendors are not limiting the distribution of merchandise."
Ladenburg Thalmann & Co. analyst Eric Beder agreed, noting also that the company is likely to use its inventory as collateral to refinance its existing revolving loan, a common practice among retailers that often lands them 50-to-70 percent of the inventory's value.
Additionally, he said the company currently is in a position to be able to pay off $120 million in debt due during the next two years, excluding its revolving loan.
"Suppliers are getting paid on time. And if you look just seasonally, this is one of the periods of lowest inventories for retailers, so this shouldn't be a period where you should have a lot of financial pressure on you," Ladenburg Thalmann's Beder said.
Ulysses Yannas, an analyst at Buckman Buckman & Reid, also believes a Chapter 11 filing is unlikely as Kmart is securing its financing with inventory he values at $6 billion.
Though the company has steadily lost ground to rival Wal-Mart it still manages to pull in about $37 billion in annual sales.
However, obtaining new financing became more difficult for Kmart Monday when Standard & Poor's cut its debt rating to junk status just days after Moody's Investors Service did the same.
The downgrades will make new financing more expensive and difficult to obtain.
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Separately, Moody's has placed all ratings of Fleming Cos. (FLM: Research, Estimates) under review for possible downgrade, citing the food distributor's exposure to Kmart, from which it gets more than 20 percent of its sales, the ratings firm said. 
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