BUSINESS
The Michigan Daily - Wednesday, January 23, 2002 - 5
Kmart files for Chapter
11
bankruptcy
DETROIT (AP) - Kmart Corp., the dis-
count chain that gave America the Blue-
Light Special and introduced Martha
Stewart fashions at cut-rate prices, filed for
Chapter 11 bankruptcy yesterday.
It's the largest retailer in history to seek
court protection from creditors.
The No. 3 discount retailer, which started
as a five-and-dime store in Detroit more
than a century ago, has struggled against
Wal-Mart Stores Inc. and Target Corp., and
yesterday saw its stock plunge nearly 60
percent. Kmart shares closed at 70 cents,
down $1.04 from $1.74 at Friday's close.
As part of its reorganization, Troy-based
Kmart said it will evaluate the performance
of every store and terms of every lease by
the end of the first quarter of 2002, and will
close unprofitable or underperforming
stores.
Some retail analysts said they expected
Kmart would have to close about 300 of its
more than 2,100 stores, but said they want
to see a more detailed plan and a vision of
the company's future.
"At this point the outline of their strategic
plan sounds a lot like what they offered up
when (CEO Chuck) Conaway took the job,"
in May 2000, said analyst Emme Kozloff
with Bernstein Sanford. "What I'm looking
for are tactical elements."
Kmart filed for protection because of
several factors, including lower-than-
expected holiday sales and earnings perfor-
mance in the fourth quarter, the company
said. Fourth quarter earnings are to be
released next week. The filing was made in
U.S. Bankruptcy Court for the Northern
District of Illinois in Chicago.
Kmart said it had secured $2 billion in
financing from Credit Suisse First Boston,
Fleet Retail Finance Inc., General Electric
Capital Corp. and J.P. Morgan Chase Bank.
The financing, subject to bankruptcy court
approval, will help the company's cash flow
while it restructures.
The company said it has targeted emer-
gence from Chapter 11 in 2003.
"We are determined to complete our reor-
ganization as quickly and smoothly as pos-
sible, while taking full advantage of this
chance to make a fresh start and reposition
Kmart for the future," Conaway said in a
statement.
But while Kmart figures out its business
strategy, Kmart customers might find some-
where else to shop, Kozloff said. Filing for
bankruptcy means the shelves aren't going to
be fully stocked the next day, something the
company already struggles with, she said.
"You're going to frustrate customers and
they're going to go and it's going to be hard
to get them back," Kozloff said.
For Kmart's suppliers, the bankruptcy fil-
ing was welcome news.
Kmart on Monday failed to make a regu-
lar weekly payment to its primary food dis-
tributor. Fleming Cos. cut off shipments to
Kmart, saying it was owed $78 million. But
yesterday, Fleming said it intends to resume
deliveries to Kmart "upon receiving satis-
factory assurances from Kmart, via the
bankruptcy court."
"First and foremost, the Kmart filing
helps define the path forward in our rela-
tionship," said Mark Hansen, chairman of
the board and chief executive officer of
Fleming.
Other suppliers have delayed or stopped
shipments to Kmart in recent days. But
bankruptcy expert Martin Zohn with
Proskauer Rose LLP said the filing will
restore confidence.
"The Chapter 11 brings order to the
process. ... It has straightforward rules and
for some reason people find that reassur-
ing," Zohn said. "The one thing Chapter 11
can't solve is the quality of actual merchan-
dise and sales."
Kmart has long struggled to compete
with lower-priced Wal-Mart and higher
quality Target, but took a sharper dive after
Jan. 1.
Debt rating agencies, including Standard
& Poor's, lowered their credit ratings for
Kmart, and the company was removed from
S&P's benchmark index of 500 leading
stocks. Moody's Investors Service, the other
major credit ratings service, lowered
Kmart's debt two notches.
Kmart listed its assets in its bankruptcy
filing at $16.3 billion, with $10.3 billion in
total debts, making it the largest retailer to
declare bankruptcy. Previously, Federated
Department Stores Inc., with $9.1 billion in
assets, was the largest when it filed in Janu-
ary 1990 and emerged two years later.
Analysts for weeks had predicted Kmart
would file for bankruptcy. On Thursday, the
retailer named turnaround expert James
Adamson to replace Conaway as chairman.
The company's president, Mark Schwartz,
left the company.
Yesterday, Ronald Hutchison was named
executive vice president and chief restruc-
turing officer, a new position. Hutchison
was most recently chief financial officer of
Advantica Restaurant Group Inc., where he
and Adamson were instrumental in the com-
pany's successful reorganization.
Kmart to evaluate its market
position, begin restructuring
NEW YORK (AP) - Debt restructuring,
dramatic store closings and even a smooth
transition out of Chapter 11 bankruptcy will
not resolve Kmart Corp.'s biggest challenge:
How will it stake out a successful niche in the
face of stiff competition from Target Corp.
and Wal-Mart Stores Inc.?
The nation's third-largest discounter has
been bedeviled by eroding market share and
an identity crisis for at least a decade. But
analysts believe that given the increasingly
cutthroat retail environment, the Troy, Mich.-
based company, with about 2,100 stores, must
fight harder to find its reason for existence.
Wal-Mart Stores, the world's largest retail-
er, has successfully carved out a niche as the
lowest-price operator, while Target has built a
reputation as a chic purveyor of fashion and
home furnishings. Kmart has tried to go after
the mom, by joining in powerful licensed
partnerships with Martha Stewart, Walt Dis-
ney and Sesame Street, but analysts believe
the strategy still lacks clarity,
"I think it will be extremely difficult to pull
out of this," said Kevin Murphy, a research
director of retail operations at Gartner G2, a
research firm. "Just cutting back on unprof-
itable stores, isn't going to save the company.
They continue to be pressed by the expansion
of Target and Wal-Mart. In order to compete
going forward, they need to find some point
of focus."
This past holiday season, Kmart received
a painful lesson that it couldn't beat Wal-
Mart on price, when it reduced advertising
circulars, and cut prices on 38,000 items, or
about 40 percent of its merchandise. Last
year, it also resurrected the BlueLight Spe-
cial. The strategy backfired, with Kmart
turning in a disappointing 1 percent drop in
sales in December at stores open at least a
year. On the other hand, Wal-Mart generated
an 8 percent gain in same-store sales, beat-
ing Wall Street expectations for a 5.6 percent
gain.
Kmart's pricing campaign was the latest
strategy from Charles Conaway, who came on
board 18 months ago as chairman and chief
executive. And although analysts attribute the
company's weak holiday sales in part to a
downturn in the economy, they lay most of
the blame on Conaway, whom they believe
didn't come up with the appropriate revival
strategy.
Last Thursday, in an effort to shore up
investor confidence, Kmart's board fired the
company's president, Mark Schwartz, and
hired James B. Adamson, a turnaround spe-
cialist, as chairman - replacing Conaway,
who remains as chief executive.
Adamson is the former chairman, president
and chief executive officer of Advantica, one
of the nation's largest restaurant companies,
which operates Denny's. He helped lead the
company out of bankruptcy in 1998. He also
played a significant role in getting back
respect for Denny's, which was mired in a
number of claims of racial discrimination.
In its Chapter 11 filing, Kmart offered few
clues regarding its turnaround strategy,
though it reaffirmed its commitment to cater-
ing to the mother, developing exclusive
brands and to cutting costs. The company is
expected to file a turnaround plan within the
next 30 days, according to analysts.
"It is too early to tell, but clearly the strate-
gy that Conaway offered had a lot of holes in
it," said Shelly Hale, an analyst at Banc of
America Securities. "It will be interested to
see what they embrace."
Hale expects the company to close as many
as 700 stores, and believes that Kmart will re-
emerge as a $25 billion company. Last year,
the retailer generated sales of $37 billion.
Such drastic store reductions, she believes,
should have been done by Conaway sooner.
Still, while acknowledging the need for
drastic store closings, Bert Flickinger III,
managing director of Reach Marketing, a
consulting firm, fears that Kmart will run the
risk of further losing its customers to com-
petitors during its retrenchment period. Tar-
get' is expected to open at least 100 stores,
while Wal-Mart plans to open at least 600
stores over the next two years he said. That
number could be accelerated, he said.
"Its competitors will be closing in to try to
capture as much Kmart business as possible,"
Flickinger said.
AP PHOTO
A Kmart employee gathers up shopping carts at the Lorain, Ohio, Super Kmart yesterday, the same day
that Kmart Corp. became the largest retailer to declare for Chapter 11 bankruptcy.
FBI investigation into
Enron practices begins
HOUSTON (AP) - FBI agents arrived at
Enron's headquarters yesterday following
allegations of document shredding, while
shareholders suing the fallen energy giant
asked a federal judge to bar the company and
its former auditor from destroying any more
records.
The FBI declined to comment, but Enron
officials said the agents were on hand to talk
with workers and check into the claims. It also
said it has posted security guards to block
employees from floors holding accounting and
finance records.
"The company has done everything you'd
expect under these circumstances," Enron
attorney Kenneth Marks told U.S. District
Judge Melinda Harmon.
In Washington, the White House disclosed
that President Bush's mother-in-law, Jenna
Welch, had invested in Enron and lost $8,100.
Bush, a friend of Enron chairman Kenneth
Lay, said again that he had no intention of
releasing details of Enron contacts with White
House aides who developed his energy plan,
saying if "somebody has an accusation of
wrongdoing, let me know."
Congressional investigators also said they
will subpoena senior officials at Enron's for-
mer auditor, Arthur Andersen, including the
chief executive, to testify tomorrow.
Enron slid into the biggest bankruptcy in
U.S. history last month after investigators
began looking at a series of complex partner-
ships that were used to keep hundreds of mil-
lions in losses off the books. Thousands of
employees lost their jobs and their retirement
nest eggs when Enron stock crashed.
Con gress i
WASHINGTON (AP) - Congressional
investigators will subpoena senior officials of
the Arthur Andersen auditing firm, including
the chief executive and a fired auditor, in an
effort to force their testimony tomorrow in the
Enron controversy.
Ken Johnson, spokesman for the House
Energy and Commerce Committee, said the
panel's chairman, Rep. Billy Tauzin (R-La.)
Shareholders are suing Enron executives
and directors over more than $1 billion they
gained from selling Enron stock from 1998
through last November.
One of the shareholder attorneys, William
Lerach, carried a box of shredded paper into
court yesterday, saying it came from a former
Enron executive who saw Enron employees
destroying documents as recently as last
week.
"This is the shredded evidence that we got
out of Enron," Lerach said as he entered court.
Marks, the Enron attorney, said company
officials late Monday seized a trash can filled
with shredded documents after learning of the
allegations. The company said the FBI was
called in at its request.
Arthur Andersen acknowledged earlier this
month that its Houston office had shredded
Enron-related documents. The office is now
under a court order not to destroy any more
Enron files.
Lerach said shareholders' attorneys want to
inspect the auditor's remaining Enron-related
documents and take depositions from top
company personnel. Lerach said that plan
would be presented to the judge today.
Arthur Andersen attorney Rusty Hardin told
Harmon that the company has its Enron-relat-
ed documents under guard.
"The shredding is over," he said.
The allegations that Enron employees were
shredding documents at the 50-story head-
quarters were made public in a court brief
released Monday by Lerach's law partner, Paul
Howes.
In it, Maureen Raymond Castaneda, who
An unidentified person leaves Enron Corp. headquarters in Houston yesterday. FBI agents were at the
energy firm's headquarters to investigate allegations that massive document destruction took place at
the company starting after Thanksgiving.
Sprint
continues
wireless
expansion
Los Angeles Times
For Sprint PCS, it has pretty
much come down to this: Make it
big in wireless data, or prepare to
be eaten.
William Esrey, chairman of par-
ent Sprint Corp., prefers the former
and is pressing ahead with aggres-
sive upgrades that by July would
produce the fastest coast-to-coast
mobile data network system in the
country.
For Kansas City, Mo.-based
Sprint PCS, the upgrades represent
its first real chance to catch up to
the wireless giants that lead the U.S.
market: Verizon Wireless, Cingular
Wireless and AT&T Wireless.
Sprint PCS' growth so far has been
impressive, giving it a subscriber
base that quintupled in the last five
years to 14.4 million customers.
But in the booming U.S. wireless
market, that's only good enough for
fourth place. Verizon Wireless, the
market leader, has more than twice
as many customers, with 30 million.
Analysts expect the U.S. wireless
industry to consolidate into two or
three giant carriers, and they
believe that Sprint PCS must move
up the food chain in a hurry if it
wants to be one of the survivors.
If Esrey is rattled, it isn't show-
ing. Sprint PCS has converted two-
thirds of its network to handle data
at higher speeds, and that progress
makes him nearly giddy over what
he calls a "substantial" lead in the
race toward third-generation mobile
phone services. In the long-heralded
3G era, wireless connections can
handle everything from video to e-
mail attachments with relative ease.
was laid off last week as Enron's director of
foreign exchange and sovereign risk, said a
"gather-review-shred" process involving
finance and accounting employees began Oct.
31, when the Securities and Exchange Com-
mission announced a formal investigation into
Enron's finances.
She said the shredding continued through at
least Jan. 14 and involved thousands of docu-
ments.
Lerach said Castaneda took boxes of shred-
ded documents home, intending to use it as
packing material. She gave Lerach's team the
shreds, which Howes said were clearly marked
as related to the partnerships that led to the
company's downfall.,
The lawyers welcomed the arrival of the
FBI.
"I'd be surprised if there's any more shred-
ding after that," Lerach said. He said he was
satisfied "the FBI can watch over them."
Robert Bennett, a Washington lawyer rep-
resenting Enron, said the company told
employees after coming under investigation
that they were not to destroy relevant docu-
ments. He said the company is looking into
charges papers were destroyed despite that
directive.
ssues subpoenas to Enron officials
Duncan already has talked to committee inves-
tigators.
Robert Giuffra, one of his attorneys, said
yesterday evening that no decision had been
made on whether Duncan would testify. "We
have not received a subpoena," he said.
Temple and Odom, while expressing will-
ingness to testify, have raised concerns about
protecting confidential information relating to
allegations that massive document destruction
took place at the company starting after
Thanksgiving and continuing until as recently
as last week.
The Securities and Exchange Commission
started looking into Enron's accounting in
mid-October, after the company reported a
third-quarter loss of more than $600 million.
The SEC's inquiry eventually included
of Enron campaign donations, has decided to
remove himself from part of the wide-ranging
congressional investigations.
Gramm will be absent from hearings focus-
ing on what went wrong at Enron but will take
part in more general inquiries into accounting
standards, investor protection issues and other
matters, spokesman Larry Neal said.
In a sprawling inquiry with both financial