Kmart’s Woes Drive Stock Lower
Its stock has spiraled to a 13-year low. Its debt rating has been lowered to just above the level afforded junk bonds. Rumors swirl around it on Wall Street like buzzards over road kill.
These are not happy days at Kmart Corp.
Most mass merchandisers are struggling in the face of intense competition and sluggish fall sales. But Kmart, trying to overcome years of lethargy, seems to have been singled out lately for Wall Street’s wrath.
Consider:
Kmart stock plummeted 36 percent in October and dropped further to $7.62-1/2 a share on Friday, a level not seen since 1982. Although the stock rebounded a bit Monday to $8.37-1/2, it’s still way down from $14 in January and $28 in November 1992.
The latest stock plunge was triggeredd by a rumor, denied by management, that Kmart was considering Chapter 11 bankruptcy reorganization.
Duff & Phelps Credit Rating Co. lowered its rating on about $2 billion of Kmart’s long-term debt Friday, further depressing the retailer’s stock. Standard & Poor’s and Moody’s Investment Service have Kmart on a credit watch and may lower their ratings, too.
Wall Street is skeptical about chief executive Floyd Hall’s recently announced plan to lure more customers with a front-of-the-store section offering low-cost, low-profit snacks, detergent and other consumables. Hall said testing showed many customers also ended up buying biggerticket items.
Kmart’s merchandising chief, former Macy’s executive Charles Chinni, resigned last month after just eight months at the company, leading to speculation there was discontent in the executive suite. “To some extent there’s an overreaction to any bit of bad news with Kmart,” said Michael Zucker, who watches the retailer for an institutional shareholder, the Union of Needletrades, Industrial and Textile Employees.
“They’ve been down so long that everything tends to looks bad.”
Indeed, Kmart’s troubles have been growing for years. Its former management was criticized for letting the core discount stores slide, while competitors such as Wal-Mart and Target grabbed market share.
The board replaced chairman and CEO Joseph Antonini in June with Hall, a former Target chief executive, who continued the store closures and layoffs started by his predecessor. Kmart closed 207 stores this year, following 121 in 1994. About 25,000 employees were let go.
But Wall Street is still waiting for some signs of a turnaround.
Kmart expects to announce its 11th consecutive quarter of disappointing earnings Thursday. Management warned investors a month ago that it expected earnings “well below” last year’s third-quarter performance of $39 million.
“Given the retail trends we’re all seeing, Kmart probably will get fairly deep into loss territory,” said Ron Petrie of Roney & Co. in Detroit.
It would be Kmart’s third consecutive quarterly loss and follow a $54 million loss in the second quarter.
“This originally was the quarter where I think most of us expected the company to show an increase in profit,” Joseph Ronning of Brown Brothers Harriman in New York said Monday.
“The sales figures they have been generating have been respectable in today’s market, but they’ve been at the cost of decreased profit margins.”
Analyst Wayne Hood of Prudential Securities Inc. in Atlanta said he was waiting until the first-quarter results are in next spring for any concrete signs of a turnaround.
The most pressing question is whether the credit rating agencies will wait that long, he said.
If Kmart’s credit rating were to fall to junk-bond status, it would trigger “put back” provisions on $681 million of Kmart’s real-estate debt, which could require the company to buy back its bonds immediately.
If more than $100 million of that debt were put back, Kmart’s bankers also could demand that it immediately replay outstanding loans under its lines of credit.
“They’d probably have to get waivers on some of their bank agreements,” Hood said. “It doesn’t mean they couldn’t survive. It just raises the bar for them.”
Still, the potential of increased financing costs for such a big retailer worries Wall Street.
Kmart spokeswoman Mary Lorencz declined to comment on the company’s woes Monday. But Kmart tried to ease investor fears in a statement last week:
“Given the significant operational improvements made in 1995 and the strength of the company’s balance sheet, we do not anticipate that Kmart will lose its investment grade rating,” Vice President Marvin Rich said. “We are working with outside advisers to resolve this issue.”