Kmart Holding Corporation Reports Third Quarter 2003 Results
Net loss narrows; margin, operating costs improve Zero borrowing level sustained through peak buying season
Kmart Holding Corporation (NASDAQ: KMRT) announced today the Company's financial results for the third quarter of fiscal 2003.
For the 13 weeks ended October 29, 2003, Kmart Holding Corporation (Kmart) reported a net loss of $23 million, or ($0.26) per share. Kmart Corporation reported a net loss of $383 million for the 13 weeks ended October 30, 2002(1).
Loss before interest, reorganization items, income taxes and discontinued operations was $10 million for the third quarter of 2003, versus a loss of $328 million in the same period a year ago.
Net sales for the 13 weeks ended October 29, 2003, were $5.092 billion, a decrease of 21.2 percent from $6.459 billion a year ago. On a same-store basis, sales declined 8.6 percent for the third quarter of 2003, compared to the third quarter of 2002. The decrease in same-store sales is due primarily to the year-over-year comparison with several Company-wide promotional events that were taking place a year ago, and the reduction in the frequency of mid- week advertising circulars in the current year. The decrease in total sales is attributable to the decrease in same-store sales and the closure of 316 stores during the first quarter of fiscal 2003.
Julian C. Day, President and Chief Executive Officer of Kmart, said: "We continue to actively manage our business in a disciplined fashion steadily increasing our margin realization, reducing operating costs, enhancing the productivity of our assets and improving the overall store experience for our customers. Our focus on profitable sales and a consequent reduction in losses from clearance sales and promotional events resulted in a decrease in same- store sales in the third quarter. The actions we have taken to drive profitability contributed to a mid-teens decline in November same-store sales, but allowed us to operate the Company profitably in November 2003." Last year the Company reported a loss for November (neither period included the Thanksgiving Holiday weekend).
As of October 29, 2003, Kmart had approximately $0.9 billion in cash and cash equivalents, and borrowing availability of approximately $1.6 billion on its $2 billion credit facility inclusive of outstanding letters of credit. In light of its favorable liquidity position, the Company has since voluntarily reduced the size of its credit facility to $1.5 billion to reduce the overall cost of the facility.
Day added, "The strength of our liquidity position is especially noteworthy, as we have progressed through the peak buying period for the holiday season with no direct borrowings drawn from our credit facility. In fact, at our point of lowest liquidity, the Company had over $800 million in cash and cash equivalents."
Gross margin increased $61 million to $1.167 billion, for the 13 weeks ended October 29, 2003, from $1.106 billion for the 13 weeks ended October 30, 2002. Gross margin, as a percentage of sales, increased to 22.9 percent for the 13 weeks ended October 29, 2003, from 17.1 percent for the comparable period in the prior year. The overall improvement in gross margin rate is primarily attributable to lower distribution costs as a result of the Company's in-sourcing of pantry, food and consumable products, lower depreciation expense resulting from impairment charges taken while operating in bankruptcy and as a result of the write-off of long-lived assets in conjunction with the application of Fresh-Start accounting. A lower rate of inventory shrinkage, supplier cost reductions and an improved sales mix stemming from a significant decrease in promotional sales events and mid-week circulars also contributed to the margin improvement. Gross margin also benefited from the reclassification of co-op advertising recoveries recorded in Cost of sales, buying and occupancy in 2003, as required under generally accepted accounting principles. These improvements in the gross margin rate were partially offset by the impact of clearance markdowns.
Selling, general and administrative expenses (SG&A), which includes advertising costs (net of co-op recoveries of $108 million in 2002), decreased $270 million to $1.178 billion for the 13 weeks ended October 29, 2003 compared to $1.448 billion for the 13 weeks ended October 30, 2002. The decrease in SG&A is primarily due to the reduction of the Company's store base after closing 316 stores during the first quarter of fiscal 2003, as well as a decrease in payroll and other related expenses from corporate headquarters' cost reduction initiatives. In addition, lower depreciation expense resulting from impairment charges taken while operating in bankruptcy and the write-off of long-lived assets in conjunction with Fresh-Start accounting combined with a decrease in advertising expense contributed to the improvement in SG&A expenses. Collectively, these reductions were partially offset by the impact of the reclassification of co-op recoveries, as discussed above. SG&A, as a percentage of sales, increased to 23.1 percent for the 13 weeks ended October 29, 2003, from 22.4 percent for the comparable period in the prior year. As a percent of sales, the increase is due primarily to the reclassification of co- op advertising recoveries as discussed above.
Disclosure of Financial Information in Accordance with Regulation FD Year-to-date Adjusted EBITDA
Year-to-date Adjusted EBITDA (Year-to-date earnings before interest, taxes, depreciation, amortization, reorganization costs, fresh start valuation charges, restructuring, impairment and other charges and other bankruptcy- related items) was $166 million. Disclosure of Year-to-date Adjusted EBITDA is being made for purposes of communicating to employees year-to-date performance results as compared to the performance goals outlined in the Company's incentive compensation program, and accordingly, to comply with the disclosure requirements under Regulation FD.
Year-to-date Adjusted EBITDA is a non-GAAP financial measure. Year-to- date Adjusted EBITDA is not the same as EBITDA defined in Kmart's credit facility. Year-to-date Adjusted EBITDA is a Company-defined metric used solely by Kmart's management for the administration of the Company's incentive compensation program for eligible employees. Year-to-date Adjusted EBITDA is not a measure or indicator of the overall financial condition or performance of Kmart and should not be used by investors as a basis for formulating investment decisions. Set forth below and as required under Regulation G, is a reconciliation of the Condensed Consolidated Statements of Operations to Year-to-date Adjusted EBITDA:
Net loss for the 13 weeks ended October 29, 2003 (Successor) $(23)
Net loss for the 13 weeks ended July 30, 2003 (Successor) (5)
Net loss for the 13 weeks ended April 30, 2003 (Predecessor) (862)
(890)
Year-to-date adjustments to reconcile Net Loss for the
26 weeks ended October 29, 2003 and the 13 weeks ended
April 30, 2003 to year-to-date adjusted EBITDA:
Discontinued operations 10
Interest expense, net 102
Benefit from income taxes (21)
Depreciation and amortization 141
Reorganization items, net 769
Restructuring, impairment and other charges 37
Post-emergence bankruptcy-related items, net 27
Other 1
Year-to-date adjusted EBITDA $166
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Successor Prede- Successor Prede- Prede-
cessor cessor cessor
Company Company Company Company Company
13-Weeks 13-Weeks 26-Weeks 13-Weeks 39-Weeks
Ended Ended Ended Ended Ended
October October October April October
29, 2003 30, 2002 29, 2003 30, 2003 30, 2002
Sales $5,092 $6,459 $10,744 $6,181 $20,823
Cost of sales, buying and
occupancy 3,925 5,353 8,344 4,762 17,784
Gross margin 1,167 1,106 2,400 1,419 3,039
Selling, general and
administrative expenses 1,178 1,448 2,401 1,421 4,653
Restructuring, impairment and
other charges - (6) - 37 8
Equity income in
unconsolidated subsidiaries (1) (8) (3) (7) (27)
(Loss) income before interest,
reorganization items, income
taxes and discontinued
operations (10) (328) 2 (32) (1,595)
Interest expense, net 24 37 45 57 102
Reorganization items, net - 4 - 769 259
Benefit from income taxes (11) (7) (15) (6) (19)
Loss before discontinued
operations (23) (362) (28) (852) (1,937)
Discontinued operations (net
of income taxes of $0, $0
and $0, respectively) - (21) - (10) (181)
Net loss $(23) $(383) $(28) $(862) $(2,118)
Basic/diluted loss before
discontinued operations $(0.26) $(0.72) $(0.32) $(1.63) $(3.85)
Discontinued operations - (0.04) - (0.02) (0.36)
Basic/diluted net loss per
common share $(0.26) $(0.76) $(0.32) $(1.65) $(4.21)
Basic/diluted weighted
average shares (millions) 89.6 502.5 89.6 522.7 502.7
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
(Unaudited)
Successor Predecessor
Company Company
October 29, January 29, October 30,
2003 2003 2002
ASSETS
Current Assets
Cash and cash equivalents $941 $613 $381
Merchandise inventories 4,404 4,825 6,330
Other current assets 552 664 687
Total current assets 5,897 6,102 7,398
Property and equipment, net 115 4,892 5,764
Other assets and deferred charges 105 244 230
Total Assets $6,117 $11,238 $13,392
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Long-term debt due within one year $61 $ - $ -
Accounts payable 1,203 1,248 1,825
Accrued payroll and other
liabilities 733 710 691
Taxes other than income taxes 295 162 306
Total current liabilities 2,292 2,120 2,822
Long-term Liabilities
Long-term debt and mortgages
payable 24 - 575
Capital lease obligations 419 623 660
Pension obligation 867 - -
Unfavorable operating leases 322 - -
Other long-term liabilities 486 181 209
Total long-term liabilities 2,118 804 1,444
Total liabilities not subject to
compromise 4,410 2,924 4,266
Liabilities subject to compromise - 7,969 7,128
Predecessor Company obligated
mandatorily redeemable convertible
preferred securities of a subsidiary
trust holding solely 7 3/4% convertible
junior subordinated debentures (redemption
value $648 and $883, respectively) - 646 874
Shareholders' Equity (Deficit)
Successor Company preferred
stock 20,000,000 shares
authorized; no shares outstanding - - -
Predecessor Company common
stock $1 par value, 1,500,000,000
shares authorized; 519,123,988 and
503,458,279 shares outstanding,
respectively - 519 503
Successor Company common stock
$0.01 par value, 500,000,000
shares authorized; 89,655,445
shares outstanding 1 - -
Capital in excess of par value 1,735 1,922 1,709
Treasury stock, at cost (1) - -
Accumulated deficit (28) (2,742) (1,088)
Total shareholders' equity (deficit) 1,707 (301) 1,124
Total Liabilities and
Shareholders' Equity (Deficit) $6,117 $11,238 $13,392
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Successor
Company Predecessor Company
26-Weeks 13-Weeks 39-Weeks
Ended Ended Ended
October 29, April 30, October 30,
2003 2003 2002
Cash Flows From Operating Activities
Net loss $(28) $(862) $(2,118)
Adjustments to reconcile net
loss to net cash (used for)
provided by operating activities:
Restructuring, impairments and
other charges - 44 788
Reorganization items, net - 769 278
Depreciation and amortization 10 177 558
Equity income in unconsolidated
subsidiaries (3) (7) (27)
Dividends received from Meldisco - 36 45
Cash used for store closings
and other charges (11) (64) (147)
Cash used for payments of exit
costs and other reorganization
items (470) (19) (113)
Change in:
Inventories 27 480 (1,202)
Accounts payable 43 (117) 859
Deferred income taxes and taxes
payable (4) (16) (23)
Other assets (10) 123 49
Other liabilities 50 32 252
Net cash (used for) provided by
operating activities (396) 576 (801)
Cash Flows From Investing Activities
Proceeds from sale of
property and equipment 93 64 13
Capital expenditures (61) (4) (206)
Net cash provided by (used for)
investing activities 32 60 (193)
Cash Flows From Financing Activities
Proceeds from issuance of debt 60 - -
Proceeds from DIP Credit Facility - - 245
Payments on debt (36) (1) (22)
Purchase of treasury stock (3) - -
Debt issuance costs (46) - (36)
Payments on capital lease
obligations (29) (16) (57)
Fees paid to Plan Investors (13) - -
Issuance of common shares 140 - -
Net cash provided by (used for)
financing activities 73 (17) 130
Net change in cash and cash equivalents (291) 619 (864)
Cash and cash equivalents, beginning
of period 1,232 613 1,245
Cash and cash equivalents, end of
period $941 $1,232 $381
Footnote 1:
Upon emergence from bankruptcy on May 6, 2003, Kmart Corporation (Predecessor Company) applied the provisions of Fresh-Start accounting effective as of April 30, 2003, at which time a new reporting entity, Kmart Holding Corporation (Kmart), was deemed to be created. As a result of applying Fresh-Start accounting, the reported historical financial statements of the Predecessor Company for periods ended prior to May 1, 2003 generally are not comparable to those of Kmart. Therefore, comparisons of earnings per share data are not included herein. As referenced within this news release, results of operations for the 13 weeks ended April 30, 2003 and periods ended in fiscal 2002 refer to the Predecessor Company.
About Kmart Holding Corporation
Kmart Holding Corporation (NASDAQ: KMRT) and its subsidiaries (together, "Kmart") is a mass merchandising company that offers customers quality products through a portfolio of exclusive brands that include THALIA SODI, DISNEY, JACLYN SMITH, JOE BOXER, KATHY IRELAND, MARTHA STEWART EVERYDAY, ROUTE 66 and SESAME STREET. Kmart operates more than 1,500 stores in 49 states and is one of the 10 largest employers in the country with 170,000 associates. For more information visit the Company's website at www.kmart.com .
Cautionary Statement Regarding Forward-Looking Information and Other Matters
Statements made by Kmart which address activities, events or developments that we expect or anticipate may occur in the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect Kmart's current views with respect to current events and financial performance. Such forward-looking statements are based upon assumptions concerning future conditions that may ultimately prove to be inaccurate and involve risks, uncertainties and factors that could cause actual results to differ materially from any anticipated 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, factors relating to Kmart's internal operations and the external environment in which it operates; marketplace demand for the products of Kmart's key brand partners as well as the engagement of appropriate new brand partners; increasing competition from other retailers; Kmart's ability to operate pursuant to its credit facility; outcome of negotiations on collective bargaining agreements and other labor issues with unions representing employees in our distribution centers; Kmart's ability to obtain and maintain normal terms with its vendors, attract and retain customers, obtain and maintain appropriate inventory, implement its business plan and strategies, attract, motivate and/or retain key executives and associates; and other risks detailed in Kmart's Securities and Exchange Commission filings. Kmart undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances after the date such statements were made.
SOURCE: Kmart Holding Corporation
CONTACT: Kmart Media Relations, +1-248-463-1021, or Kmart Investor
Relations, +1-248-463-1040
Web site: