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Wednesday, 23 January, 2002, 10:49 GMT
Kmart files for bankruptcy
Kmart shop in Dallas, Texas
Kmart: Could not keep pace with rival Wal-Mart
Kmart, the second-biggest discount retailer in the US, has filed for bankruptcy protection.

The company, which has more than 2,000 stores and employs 250,000 people, is thought to be the largest retailer ever to make such a filing.

Along with failed energy giant Enron, it is one of the most high profile corporate casualties since the US economic slowdown began.

We are committed and determined to complete our reorganisation as quickly and smoothly as possible

Charles Conaway, chief executive
Under the terms of the so-called Chapter 11 procedure, Kmart will be able to keep its stores open, protected from its creditors, while it attempts to restructure its business.

Kmart described the bankruptcy filing as a "fresh start" and said it would begin restructuring with the aid of a new $2bn bank loan.

Poor Christmas

Business partners have been deserting the 105-year-old chain, cutting off supplies after Kmart failed to keep up with regular payments.

Main Kmart creditors
Bankof New York: $2.38bn (trustee note)
$119.9m (loan)
Chase II:
$117.8m (loan)
Bank of New York:
$104.5m (loan)
Buena Vista Video:
$63.7m (trade)
$44.9m (trade)
Mattel Toys: $44.9m (trade)
Analysts have said the store was short of cash and had had a poor Christmas season.

In its Chapter 11 filing, Kmart said its 2,114 stores would remain open while it carried out the restructuring.

Chief executive Charles Conaway said: "We are committed and determined to complete our reorganisation as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future."

The Michigan-based retailer has secured a $2bn bankruptcy credit line from a group of banks headed by JP Morgan Chase, although access to the full amount will need court approval.

Squeezed out

Wall Street analysts had been tipping Kmart as a likely candidate for a Chapter 11 filing for some weeks as its shares tumbled to more than 30-year lows.

Its antiquated stores have found it difficult to compete with updated outlets operated by rivals such as Wal-Mart and Target, analysts have said.

Loss-making Kmart was hit by weak sales and poor logistics and found itself unable to offer the same level of discounting as Wal-Mart.

Its sales suffered further when it was forced to rein in advertising to save money, analysts said.

The company itself cited below-plan sales, a bad final quarter to last year, an erosion of supplier confidence, intense competition, unsuccessful sales and marketing initiatives and the continuing recession as reasons for the filing.

"We think Kmart is certainly not going to go out of business," Wayne Hood at Prudential Securities told the BBC's World Business Report.

The orders... will be delayed while we wait for a clear plan from Kmart to solve its financial problem

Nien Hsing Textile

"We think it will probably close as many as 500 stores, we think they could re-emerge as a stronger competitor in the future."

The bid to salvage the firm will be led by Ronald Hutchison, who was named as chief restructuring officer and appointed to the newly-created post of executive vice-president.

He will work with recently-appointed chairman James Adamson.

Pension fears calmed

In its statement, Kmart said staff pension plans were safe and that existing Kmart pensioners would continue to be paid.

Thousands of Enron pension-holders lost their retirement savings when that company collapsed.

Suppliers play safe

Tuesday's filing follows a day after Fleming, Kmart's only grocery distributor, said it would stop supplies after failing to receive a weekly payment.

Fleming was followed by gardening firm Scotts, a maker of products such as Miracle-Gro plant food, and two Taiwanese firms, retailer Test Rite and clothing firm Nien Hsing Textile.

Nien Hsing Textile, a maker of blue jeans, said on Tuesday it was delaying its weekly shipment while it awaited "a clear plan from Kmart to solve its financial problem".

Kmart said the $2bn loan would enable it to pay suppliers as normal.

Analysts agreed the fresh funding should go some way towards solving Kmart's supplier problems.

"Vendors will no longer be afraid to ship because they are worried they will not get paid," said Kurt Barnard of Barnard's Retail Consulting Group.

Kmart shares stood $0.95 lower at $0.79 in midday trading in New York.

The BBC's Rebecca Marston
"This is the biggest retailer to ever start bankruptcy proceedings"
Wayne Hood, Prudential Securities
"Kmart is certainly not going to go out of business"
Michele Hodges, Troy Chamber of Commerce
"Their departure would have both a psychological as well as a very measurable dollar impact on the community"
See also:

22 Jan 02 | Business
Kmart: Death of a retailing icon?
21 Jan 02 | Business
Suppliers desert Kmart
17 Jan 02 | Business
Silence cuts third off Kmart's value
13 Jan 02 | Business
Kmart shares plunge
02 Jan 02 | Business
Kmart slumps on bankruptcy talk
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