KMART REPORTS RISING PROFIT, FALLING COMPS

TROY, Mich. -- Kmart here last week reported a profit of $93 million on sales of $4.6 billion for its fiscal first quarter ended April 28. The discounter, which emerged from Chapter 11 bankruptcy protection a year ago, lost $862 million during the same period last year.

, reflecting the same-store decline and the closure of 316 stores during the first quarter of last year.

Adding to Kmart's profitability, the company said in its Securities and Exchange Commission filing, was a more favorable gross margin rate. While gross margin decreased by $282 million to $1.14 billion from last year's $1.42 billion, it rose to 24.6% as a percentage of sales versus 23% a year ago. Boosting the gross margin rate, the filing said there "were fewer clearance markdowns and reduced depreciation as a result of the write-off of long-lived assets in conjunction with the application of fresh-start accounting."

Julian Day, president and chief executive officer, said in a statement that the company has been focused on "profitable sales with an improved gross margin rate, reducing operating costs through operational execution and working to improve the productivity of our assets."

He added the retailer ended the quarter with $3.4 billion in inventories, a reduction of more than 23% from last year.

As reported, the Seventh Circuit Court of Appeals in Chicago in February decided that the bankrupt Kmart should not have paid $367 million to certain former key suppliers, which could have ranged from apparel firms to trash contractors, for pre-petition obligations. The SEC filing said Kmart recognized $7 million in recoveries during the quarter from vendors that received cash payments from the bankrupt entity. What is still unclear is who gets the cash, the new reorganized Kmart or the bankrupt entity for distribution to creditors.

For one analyst, there are other concerns looming. The national average of gasoline topped $2 a gallon recently, up 52 cents from a year ago, according to the U.S. Department of Energy. Richard Hastings, credit analyst at Barnard Sands, New York, observed, "Value retailers such as Kmart and Wal-Mart cater to income groups that are vulnerable to deteriorating economic conditions. Gas prices at the national average right now are only marginally affecting consumers. While it is hurting some households in some markets, we're not yet in the danger zone because in most of the country the costs are paid through debit or credit cards."

He noted that, on an adjusted inflationary basis going back 30 years, current prices are not even at 50% of where gas prices were as a portion of disposable income when the energy crisis hit in 1979.

"When the national average hits $2.75 a gallon, that's when all retail sales start to decline. When it hits $3 a gallon, then you'll have instant recession," Hastings said.

So far, Kmart's stock price is up about 235% since it began trading in May 2003. Hastings pointed out that the public float is only about 37 million shares. He noted that the shares -- boosted by net operating losses carried forward, which in turn reduces the taxes paid on the profits and helps to raise the share price -- are attractive to speculators who are "contrarian" players who "understand the business and aren't afraid to take a chance. The rewards so far have been luscious."

1ST-QUARTER RESULTS

Qtr Ended: 4/28/04; 4/30/03

Sales: $4.62 billion; $6.18 billion

Change: (25.3%)

Comp-store: (12.9%)

Net Income: $93 million; ($862 million)

Change: N/A

Inc/Share: 94 cents; N/A