Kmart: Fall of a Retailing Giant

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Case Details:

Case Code : BSTR056
Case Length : 16 Pages
Period : 2000 - 2003
Organization : Kmart
Pub Date : 2003
Teaching Note :Not Available
Countries : USA
Industry : Retailing

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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The Reorganization Initiatives

After almost a year of arranging funds, streamlining operations, organizing store closures and laying off employees, Kmart filed its plan of reorganization with the bankruptcy court in January 2003.

As per the plan, ESL Investments (ESL) and Third Avenue Value Fund were to be the two main investors. ESL converted claims worth $ 2 billion into stock and put up $ 109 million in cash for running the business. These two were to invest around $ 140 million in exchange for shares in the reorganized Kmart (with a combined stake of 54%).

And subject to certain conditions, ESL was to provide additional $ 60 million of convertible unsecured note financing. ESL also agreed to use the cash received by it (as a holder of Kmart's bank debt of approximately $ 152 million) to purchase more equity. Other holders of Kmart's debt were to be given 40 cents for each dollar of debt held...

Reorganization Roadblocks

In February 2003, Kmart reported a $ 54 million net loss on revenues of $ 2.7 billion. In the same month, the bankruptcy court approved Kmart's plan of reorganization with minor modifications. The confirmation hearing for the plan was scheduled to be finished on April 14 and 15, 2003.

The company revealed that as per preliminary projections, it foresaw earnings before interest, taxes, depreciation and amortization of $ 51 million for the three months ending March 26, 2003. From the beginning of 2003, sales were $ 4.06 billion, a little higher than the $ 4.01 billion mentioned in the plan submitted to the court.

The first obstacle to the reorganization came in the form of a dispute with a company called Capital Factors (CF). Kmart owed $ 20 million to CF, a company which bought Kmart's accounts receivables at a discount and assumed the risk of collecting the money. CF had appealed against a court decision (in 2002) which approved Kmart's plans to make payments to critical vendors...

Life Goes On - Kmart's Future Plans

Liquidation sales had begun at 317 Kmart stores across the US in January 2003. Heavy discounts were offered and sales off take was quite impressive. To lure back customers to the stores that continued to remain in business, Kmart launched the 'Savings Are Here To Stay' promotion in February 2003. The campaign included in-store events, lucky draws and money saving offers in the form of coupon books (worth over $ 150 in savings on major brands and exclusive Kmart merchandise)...


Exhibit I: Kmart - Key Financials
Exhibit II: Kmart - Stock Price Movements
Exhibit III: A Brief Note on the Industry Environment for Kmart


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