Kmart Holding Corporation reported a net loss of $862 million for the 13 weeks ended April 30, 2003, versus a net loss of $1.44 billion for the 13 weeks ended May 1, 2002.
Loss before interest, reorganization items, income taxes, and discontinued operations was $32 million for the 13 weeks ended April 30, 2003 versus a loss of $920 million for the first quarter of last year. Last year’s results include a charge of $542 million recorded in the first quarter of 2002 in connection with the store closing liquidation sales. This charge is included in cost of sales, buying and occupancy in the accompanying unaudited Condensed Consolidated Statements of Operations.
Net sales for the 13 weeks ended April 30, 2003, were $6.18 billion, a decrease of 13.9 percent from $7.18 billion in 2002. On a same-store basis, sales declined 3.2 percent from the first quarter of 2002.
Julian C. Day, President and Chief Executive Officer of Kmart, said, “This management team is very focused on building the financial foundation of the new Company. We are strengthening our business by driving profitable sales, identifying opportunities to further improve efficiency and reduce costs, and enhancing the productivity of our assets. We have increased gross margin, decreased SG&A and carefully managed our inventory. With the strong support of our new Board of Directors, we will continue to concentrate on increasing the long-term value of this enterprise.”
As of April 30, 2003, Kmart had approximately $1.23 billion in cash and cash equivalents, and borrowing availability of approximately $1.5 billion on its $2 billion credit facility, including outstanding letters of credit.
Gross margin increased $674 million to $1.42 billion, for the 13 weeks ended April 30, 2003, from $745 million for the 13 weeks ended May 1, 2002. Gross margin, as a percentage of sales, increased to 23.0 percent for the 13 weeks ended April 30, 2003, from 10.4 percent for the 13 weeks ended May 1, 2002. The increase in gross margin is primarily related to the previously mentioned charge of $542 million recorded in the first quarter of 2002 in connection with the store closing liquidation sales. In addition, the Company’s gross margin rate was favorably impacted by 2003 closing store liquidation sales, a decrease in sales of food and consumables, which carry lower margins, and a decrease in promotional markdowns, 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 $69 million in fiscal 2002) decreased $249 million for the 13 weeks ended April 30, 2003, to $1.42 billion, or 23.0 percent of sales, from $1.67 billion, or 23.3 percent of sales, for the 13 weeks ended May 1, 2002. The dollar decrease in SG&A is primarily the result of the closure of 283 stores in the second quarter of 2002 and lower payroll and other related expenses in the first quarter of 2003 stemming from corporate headquarters cost reduction initiatives. In addition, SG&A was favorably impacted by a decrease in utility expenses and electronic media advertising, and lower depreciation expense as a result of the impairment charge recorded in the fourth quarter of fiscal 2002. These decreases were partially offset by co-op recoveries recorded to SG&A in 2002 that are recorded to cost of sales, buying and occupancy in 2003, resulting from the application of EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” an increase in pension expense, and higher premiums for our workers compensation insurance.
Fresh Start Accounting
In connection with the Company’s emergence from bankruptcy, the consolidated financial statements apply the provisions of fresh start accounting in accordance with Generally Accepted Accounting Principles (GAAP). Under fresh start accounting, a new reporting entity, the “Successor Company,” is deemed to be created, and the recorded amounts of assets and liabilities are adjusted to reflect their fair value. As a result, the reported historical financial statements of the “Predecessor Company” for periods prior to April 30, 2003, as presented below, generally are not comparable to those of the Successor Company.
In applying fresh start accounting, adjustments to reflect the fair value of assets and liabilities, on a net basis, and the write-off of the Predecessor Company’s equity accounts resulted in a charge of $5.6 billion. The restructuring of Kmart’s capital structure and resulting discharge of pre- petition debt resulted in gain of $5.6 billion. The charge for the revaluation of the assets and liabilities and the gain on the discharge of pre-petition debt are recorded in Reorganization items, net in the unaudited Condensed Consolidated Statement of Operations. In addition, the excess of fair value of net assets over reorganization value (“negative goodwill”) was allocated on a pro-rata basis and reduced non-current assets (property and equipment, net), to $10 million in accordance with GAAP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Predecessor Company
13 Weeks Ended
April 30, May 1,
2003 2002
Sales $6,181 $7,181
Cost of sales, buying and occupancy 4,762 6,436
Gross margin 1,419 745
Selling, general and administrative
expenses 1,421 1,670
Restructuring, impairment and other
charges 37 -
Equity income in unconsolidated
subsidiaries 7 5
Loss before interest, reorganization
items, income taxes and
discontinued operations (32) (920)
Interest expense, net (contractual
interest for 13 week periods ended
April 30, 2003 and May 1, 2002 was
$124 and $102, respectively) 57 33
Reorganization items, net 769 251
Benefit from income taxes (6) (12)
Loss before discontinued operations (852) (1,192)
Discontinued operations (10) (250)
Net loss $(862) $(1,442)
