Footstar, Inc. is suddently the darling in a down market. As both the Dow and the S&P 500 dipped over 1% on Wednesday, Footstar jumped another 32.34% to close at $9.78. The rise was on top of the almost 22% surge in share price experienced Tuesday.
The total two day 61.3% increase in share price is a result of news that Kmart plans to close fewer stores, and emerge from bankruptcy sooner, than expected.
Kmart Corp. said Tuesday it is closing 326 stores and eliminating 35,000 workers nationwide in an aggressive move to emerge from Chapter 11 bankruptcy protection by April 30. Many “street” analysts had pegged Footstars 2003 earnings per shares estimates at the 600-store closure level.
Footstar, through its Meldisco unit, runs the leased footwear departments at Kmart stores. No report has been issued yet on the strength or weakness of the footwear department in the particular stores to be closed.
The closures provide a certainty that is a “significant positive catalyst for Footstar,” said Virginia Genereux, an analyst with Merrill Lynch, in a research note. She had predicted Kmart would close 550 stores.
She said Kmart represents crucial source of revenue for Footstar, contributing to about 90% of Footstar’s operating profit this year. The planned Kmart closures accounted for $193.8 million, or 8.4%, of Footstar’s 2002 revenue of $2.3 billion.
“We see a cloud over Footstar’s stock being partially lifted by the expected closure of 326 Kmart stores, which was at the lower end of expectations,” notes Yogeesh Wagle, Standard & Poor’s Specialty Retail Equity Analyst. “The closings are expected to reduce 2003 EPS by $0.30, but have minimal impact on 03 cash flows.”
The S&P analyst also believes FTS “should also benefit from an enhanced alliance with Nike.”
The Meldisco division was one of very few bright spots in retail in December, reporting a 4.0% comp-store increase versus a 9.1% comp drop last year.
Store closings were only part of the news Kmart released Tuesday.
The company said it had obtained $2 billion in exit financing, received approval for a five-year business plan from its board of directors, posted its first monthly profit since filing for bankruptcy protection on Jan. 22, 2002 and restated its 2001 financial report. All good news for Footstar.
Executives also said they would file a plan of reorganization by Jan. 24 that calls for creditors to be paid in newly issued shares of stock. Current shareholders will not receive any new shares, and their current Kmart shares will be worthless.
Kmart has been trading on the over-the-counter bulletin board since it was delisted by the New York Stock Exchange on Dec. 19.
Ulysses Yannes, a retail analyst with Buckman, Buckman and Reid in New York, said he was surprised that Kmart planned to emerge from bankruptcy in April and that it posted a profit of $349 million in December, a tough month for many retailers.
“They had the best gross margins than they had all year,” Yannes said. “It shows me how profitable they can be. I think they have an excellent change not only to survive, but survive profitably.”
But many analysts and business experts remained skeptical Tuesday that Kmart’s latest round of store closings and firings will mark the final round of bad news for the retailer.
On the upside, Kmart will save a lot of cash by not having to pay salaries and other overhead. And the Troy-based retailer said Tuesday it will emerge from bankruptcy three months earlier than expected.
But Emme Kozloff, a retail analyst with New York-based Sanford C. Bernstein, echoed many other experts in saying that these latest cost-cutting moves may be beside the point.
“The core question isnt really what is the appropriate chain store size for Kmart, it is why should it continue to exist? Why does it have a reason to be?” she said.
Others raised the same question.
“There’s no doubt” cost cutting “will be of immediate benefit to their bottom line. But is it a long term solution? Kmart still is adrift in terms of finding its place in the market,” said Anthony Sabino, a business law professor at St. John’s University in New York.
Analysts agreed that Kmart needs to find its niche in a market dominated by the much larger and more efficient Wal-Mart. Without its own niche to exploit, Kozloff said, Kmart will just get squeezed between Wal-Mart and other more nimble competitors like Target.
“Once a retailer’s brand becomes fractured and the business model’s broken, it’s very difficult to see a cohesive successful long-term turnaround,” she said. “Especially given that their competitor is Wal-Mart. Youre talking the big gorilla.”
Executives for the discount retailer said closing nearly 17 percent of its existing store base, shutting down a distribution center in Texas and trimming jobs would ensure Kmart’s financial future.
Jim Adamson, Kmart’s chairman and chief executive, called the decision close more stores and eliminate more jobs an “extremely difficult and particularly painful,” yet “necessary action to make Kmart a stronger company.”
Kmart officials said they compiled the closing list by analyzing several factors including sales performance, lease terms, surrounding competition, distance from a distribution center and the proximity to another Kmart store. Prior to seeking protection from its creditors on Jan. 22, 2001, the company had 2,100 stores.
Kmart became the nation’s largest retailer to seek protection from its creditors when company executives filed for bankruptcy reorganization in Chicago on Jan. 22, 2002. Poor holiday sales combined with aggressive spending left the retailer short of cash and unable to pay its bills.
