Singing the blue light blues

January 18, 2002: 5:14 p.m. ET

Several companies besides Martha Stewart stand to lose some business due to Kmart's bankruptcy.
By Staff Writer Paul R. La Monica

NEW YORK (CNN/Money) - Now that Kmart has filed for bankruptcy, companies with ties to the troubled retailer are sure to invoke the words of Dustin Hoffman in the movie Rain Man: Kmart sucks.

To be sure, nobody is predicting a ripple effect as disastrous as the one following the Enron bankruptcy -- banks like Citigroup and J.P. Morgan Chase had to write off billions of dollars of bad loans to Enron. But a Kmart (KM: down $1.02 to $0.72, Research, Estimates) bankruptcy could have an effect on companies in a variety of industries.

Martha Stewart has received the most attention, because her company's eponymous line of home and garden products accounted for $1.5 billion of Kmart's sales in 2001. Although Stewart denied on CNN last Wednesday that she would end her relationship with Kmart if the company files for Chapter 11 bankruptcy, skeptics aren't so sure.

But a pullout from Kmart would hurt Martha Stewart as well (at least until she found a new retail home for her products). In the third quarter of 2001, merchandising sales accounted for 11.9 percent of Martha Stewart Living Omnimedia's (MSO: up $0.19 to $17.50, Research, Estimates) revenue, with the overwhelming majority of that revenue from Kmart royalties.

More than Martha
Other public companies are also concerned about the fate of the Blue Light special. Several have been apparently so worried about perceived exposure to Kmart that they actually issued press releases to deny that Kmart was a major customer. Trucking firm USFreightways announced after the market closed last Thursday that revenue from Kmart was "substantially less than 1 percent" of the company's total sales.

And two real estate investment trusts that own and operate shopping center properties issued statements two weeks ago about their Kmart business. Glimcher Realty announced that Kmart accounted for just 2.3 percent of rents in 2001 while Developers Diversified Realty said that 2.8 percent of its rents were from Kmart.

Not everyone is so lucky. Another REIT, Kimco Realty, counts Kmart as its largest tenant, accounting for about 13 percent of rents in Kimco's portfolio, according to Salomon Smith Barney REIT analyst Jonathan Litt, who downgraded Kimco (KIM: down $0.28 to $30.87, Research, Estimates) on Jan. 15.

Litt says because Kmart is paying a higher average rent to Kimco than to other REITs, the Kimco-owned stores are more likely to be closed if Kmart decides to shut down stores. Kmart is currently paying an average of $7.27 per square foot for the stores it leases from Kimco, according to Litt, compared to less than $3 per square foot in rent to Developers Diversified and $4.53 to another REIT, New Plan Excel Realty.

And even though Kimco shouldn't have a problem finding new tenants for any stores that Kmart shuts down, Litt says the new leases would probably be at lower rents than what Kmart paid.

Techs and suppliers with Kmart exposure
Even some technology companies have taken a hit due to Kmart concerns. Shares of Global Sports, which despite its misleading name is an e-commerce outsourcing company, are down 21.5 percent since Jan. 7, the day credit rating agency Fitch downgraded Kmart's already languishing junk bonds.

Global Sports (GSPT: up $0.07 to $17.67, Research, Estimates) operates some of the back-end aspects of Kmart's website, BlueLight.com, such as fulfillment and customer services. Shawn Milne, an analyst with Soundview Technology Group, estimates that Kmart will account for 5 to 10 percent of Global Sports' sales this year but thinks the market has overreacted.

Another technology company with exposure to Kmart is JDA Software, which announced late last year that Kmart was buying software to use in Latin American operations. Bradley Whitt, an analyst with SWS Securities, says JDA (JDAS: up $0.71 to $28.81, Research, Estimates) has not had problems getting paid so far but adds that the Kmart situation still bears watching.

The companies that are most at risk if Kmart shutters a large number of stores are Kmart's suppliers. To that end, Kmart is the largest customer of food distributor Fleming Companies. Fleming (FLM: up $1.04 to $18.31, Research, Estimates) announced on Monday that it had stopped shipments of food to Kmart since the retailer did not make its weekly payment.

Kmart accounted for 27 percent of Fleming's sales in the third quarter of 2001 and Fleming predicted in its latest quarterly filing that Kmart would account for $4.5 billon in sales in 2002. Shares of Fleming have slipped 6.6 percent so far this year.

Finally, the company that will be quoting Dustin Hoffman the most if Kmart files for bankruptcy will be shoe retailer Footstar (FTS: down $0.59 to $22.95, Research, Estimates), which operates footwear departments in Kmart under the brand name Meldisco. Footstar is by far the most highly exposed to Kmart's woes, since sales from Meldisco accounted for nearly 55 percent of total sales in the third quarter of 2001. It's no wonder then that the stock has plummeted 25 percent so far this year.