KMART OUTLINES PLANS FOR REORGANIZED COMPANY

Mark Hamstra

NEW YORK -- Kmart Corp. last week reaffirmed its commitment to food retailing and said it was "ahead of plan" in its transition to a new distribution system for food products.

Executives from the Troy, Mich.-based retailer addressed reporters at a press briefing here, covering a wide range of topics related to the company's efforts to recover from bankruptcy.

Julian Day, president and chief executive officer, Kmart, said he was confident that the company would continue to operate supercenters offering full assortments of groceries and perishables, although some sources previously told SN that the company had planned to eventually exit from that business. Its most recent round of store closings left it with about 60 SuperK stores, primarily concentrated in the Midwest, among its 1,500 remaining discount stores. The company offers some food items in all of its stores.

"Our strategy has been to pare down the number of SuperKs to a group that we have a high degree of confidence that are going to be able to operate profitably," he said. "I feel very confident in where food is going."

He said Kmart had arranged for a network of regional wholesalers to supply its SuperK stores with perishables after the company canceled its supply agreement with Fleming Cos., Dallas. Fleming was scheduled to make its last deliveries to Kmart this past weekend.

Day also noted that Kmart "has enjoyed the support of the vast majority of our vendors in that area."

In connection with the termination of that supply agreement, Fleming last week filed nearly $1.5 billion in claims against Kmart. The claims included $1.4 billion for "rejection damages," or profits that Fleming anticipated under the contract through 2006, as well as payments Fleming made to third parties for facilities and other infrastructures to support the Kmart business. Although the agreement was scheduled to run until 2011, provisions in the contract allowed it to be terminated in 2006, a Fleming spokesman told SN.

The other claims include $30 million to cover Fleming's expenses that arose after the bankruptcy filing and an adjusted pre-petition claim of $27 million, down from an original claim of $29 million, for money owed at the time of Kmart's bankruptcy filing last January.

Although the Kmart executives spoke before Fleming's claims were filed, they said they anticipated that the bankruptcy court judge could approve a limited portion of the damages sought by Fleming. Fleming would be compensated in the form of equity in the reorganized company worth about 9.7% of the cash value of the approved award, according to Jack Butler, Kmart's bankruptcy attorney.

"The actual amount of recovery that Fleming is expected to get has already been estimated as part of the claims we expect to pay landlords and vendors," said Butler.

He said Kmart had estimated a total of $3.4 billion in claims from that class of creditors, including about $500 million for former contract partners.

The company remains on track to emerge from bankruptcy by April 30. ESL Investments, Greenwich, Conn., and Third Avenue Trust, New York, are expected to own more than 50% of the newly issued shares of stock in the reorganized company.

Addressing how the reorganized company might operate, Day stressed that it would focus on driving same-store sales growth, but with a keen focus on profitability by building the total market basket; cutting costs without sacrificing customer service; and maintaining greater inventory control without risking in-stock performance.

He said the company would maintain its high-low pricing strategy, but it will instill more controls to prevent out-of-stocks on sale merchandise, which has often been cited as a major flaw in the way Kmart executed this marketing strategy.

"A great degree of our supply-chain problem was due to lax in-store discipline," Day said.

The company is developing more sophisticated in-stock measurements to help remedy this situation, he added.

In addition, individual store managers will have the discretion to order from a list of about 500 high-margin, high-volume sale items that they can promote whenever they choose.

"This company was about as centralized as it could be," Day said. "Store managers had zero input before. We are going to move responsibility as close to the store as we can."

At the same time, Day also repeatedly stressed the importance of discipline within the management ranks, saying that the "four cornerstones" of how the business will be run are honesty, integrity, discipline and leadership.

He said he's seeking a management team that has "an understanding of what we want to do from a financial point of view."

The company will set aside up to 10% of the shares in the reorganized company for the new management team, which is expected to be largely in place by the end of next month.