Kmart Holding Corporation reported a net loss of $5 million, or ($0.06) per share, for the fiscal second quarter of 2003. Kmart Corporation reported a net loss of $293 million for the 13 weeks ended July 31, 2002(1).
Income before interest, reorganization items, income taxes and discontinued operations was $8 million for the second quarter of 2003, versus a loss of $264 million in the same period a year ago. Last year's results include a charge of $27 million in the second quarter of 2002 in connection with store closing liquidation sales. This charge is included in the Cost of sales, buying and occupancy in the accompanying unaudited Condensed Consolidated Statements of Operations.
Net sales for the 13 weeks ended July 30, 2003, were $5.652 billion, a decrease of 21.3 percent from $7.183 billion a year ago. On a same-store basis, sales declined 5.4 percent for the second quarter of 2003, compared to the second quarter of 2002.
Julian C. Day, President and Chief Executive Officer of Kmart, said: “We are pleased with the progress we continue to make in our business. We are focused on profitable sales, reducing SG&A and enhancing the productivity of our assets. As a result, our liquidity position remains strong.”
As of July 30, 2003, Kmart had approximately $1.2 billion in cash and cash equivalents, and borrowing availability of approximately $1.5 billion on its $2 billion credit facility inclusive of outstanding letters of credit. In light of its favorable liquidity position, the Company is exploring various alternatives to reduce the cost of its Exit Financing Facility.
Gross margin decreased $37 million to $1.234 billion, for the 13 weeks ended July 30, 2003, from $1.271 billion for the 13 weeks ended July 31, 2002. Gross margin, as a percentage of sales, increased to 21.8% for the 13 weeks ended July 30, 2003, from 17.7% for the comparable period in the prior year. The improvement in the gross margin rate is attributable to a decrease in shrinkage and an overall improvement in the Company's sales mix. In addition, the gross margin rate was positively affected by the termination of the Company's supply arrangement with Fleming, lower buying and occupancy expenses as a result of the write-off of long-lived assets in conjunction with the application of Fresh-Start accounting and the effect of co-op recoveries recorded in Cost of sales, buying and occupancy in 2003. Previously, co-op recoveries were recorded in Selling, general and administrative expenses (“SG&A”) prior to the adoption in the fourth quarter of 2002 of EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” These improvements in the gross margin rate were 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 $91 million in 2002), decreased $307 million to $1.228 billion for the 13 weeks ended July 30, 2003 from $1.535 billion for the 13 weeks ended July 31, 2002. The decrease in SG&A is primarily due to the reduction in the Company's store base after closing 599 stores during fiscal 2002 and the first quarter of 2003, as well as a decrease in payroll and other related expenses from corporate headquarters cost reduction initiatives and lower depreciation expense due to adjustments to the book value of the Company's property and equipment, resulting from impairment charges taken while operating in bankruptcy and the write-off of long-lived assets in conjunction with Fresh-Start accounting. Collectively, these reductions were partially offset by an increase in workers' compensation expense and the impact of the reclassification of co-op recoveries as discussed above. SG&A, as a percentage of sales, increased to 21.7% for the 13 weeks ended July 30, 2003, from 21.4% for the comparable period in the prior year.
Year-to-date Adjusted EBITDA was $164 million. Disclosure of Year-to-date Adjusted EBITDA is being made for purposes of communicating to employees year- to-date performance results as compared to the performance goals outlined in the Company's incentive compensation program, and accordingly, to comply with the disclosure requirements under Regulation FD.
Year-to-date Adjusted EBITDA (Year-to-date earnings before interest, taxes, depreciation, amortization, reorganization costs, fresh start valuation charges, restructuring, impairment and other charges and other bankruptcy-related items) is a non-GAAP financial measure. Year-to-date Adjusted EBITDA is not the same as EBITDA defined in Kmart's Exit Financing Facility. Year-to-date Adjusted EBITDA is a Company-defined metric used solely by Kmart's management for the administration of the Company's incentive compensation program for eligible employees. Year-to-date Adjusted EBITDA is not a measure or indicator of the overall financial condition or performance of Kmart and should not be used by investors as a basis for formulating investment decisions. Set forth below and as required under Regulation G, is a reconciliation of the Condensed Consolidated Statements of Operations to Year-to-date Adjusted EBITDA:
Net loss for the 13 weeks ended July 30, 2003 (Successor) $(5)
Net loss for the 13 weeks ended April 30, 2003 (Predecessor) (862)
(867)
Year-to-date Adjustments to reconcile the Net loss for the
13 weeks ended July 30, 2003 and the 13 weeks ended
April 30, 2003 to Year-to-date Adjusted EBITDA:
Discontinued operations 7
Interest expense, net 78
Benefit from income taxes (11)
Depreciation and amortization 140
Reorganization items, net 769
Restructuring, impairment and other charges 37
Post-emergence bankruptcy-related items, net 14
Other (3)
Year-to-date Adjusted EBITDA $164
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Successor
Company Predecessor Company
13 Weeks 13 Weeks 13 Weeks 26 Weeks
Ended Ended Ended Ended
July 30, April 30, July 31, July 31,
2003 2003 2002 2002
Sales $5,652 $6,181 $7,183 $14,364
Cost of sales, buying and
occupancy 4,418 4,762 5,912 12,431
Gross margin 1,234 1,419 1,271 1,933
Selling, general and administrative
expenses 1,228 1,421 1,535 3,205
Restructuring, impairment and other
charges - 37 14 14
Equity income in unconsolidated
subsidiaries (2) (7) (14) (19)
Income (loss) before interest,
reorganization items, income
taxes and discontinued operations 8 (32) (264) (1,267)
Interest expense, net (contractual
interest for the 13 weeks ended
April 30, 2003 and July 31, 2002
and the 26 weeks ended
July 31, 2002 was $124, $100 and
$202, respectively) 21 57 32 65
Reorganization items, net - 769 4 255
Benefit from income taxes (5) (6) - (12)
Loss before discontinued operations (8) (852) (300) (1,575)
Discontinued operations (net of
income taxes of $2, $0, $0
and $0, respectively) 3 (10) 7 (160)
Net loss $(5) $(862) $(293) $(1,735)
Basic/diluted loss before
discontinued operations $(0.09) $(1.63) $(0.60) $(3.13)
Discontinued operations 0.03 (0.02) 0.02 (0.32)
Basic/diluted net loss per common
share $(0.06) $(1.65) $(0.58) $(3.45)
