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press release

May 15, 2002


Contact:
Media Relations
(248) 463-1021


FOR IMMEDIATE RELEASE


KMART CORPORATION REPORTS 2001 FISCAL YEAR RESULTS; RESTATEMENT OF INTERIM PERIODS

Troy, Michigan, May 15, 2002 -- Kmart Corporation (NYSE: KM) announced today the financial results for its 2001 fiscal year, which ended on January 30, 2002 – eight days after its voluntary Chapter 11 filing. Kmart also announced a restatement of its unaudited fiscal 2001 quarterly financial data, which reflects the results of the Company's previously announced investigation of accounting matters and the new management team's review of Kmart's accounting policies and methods.

Fiscal 2001 Annual Results

For the 52-week fiscal year ended January 30, 2002, Kmart reported a loss of $2.42 billion, or $4.89 per share, versus a loss of $244 million, or $0.48 per share for the 53-week fiscal year ended January 31, 2001. Excluding non-comparable items, income from reorganization items and results of discontinued operations, the Company's net loss was $987 million, or $2.00 per share, in the 2001 fiscal year versus net income of $219 million, or $0.47 per share, in the 2000 fiscal year.

Net sales for the 52-week period ended January 30, 2002 were $36.15 billion, a decrease of 2.4% from $37.03 billion for the 53-week period ended January 31, 2001. On a same-store basis, sales were essentially flat in 2001, declining 0.1 percent from the previous fiscal year.

James B. Adamson, Chairman and Chief Executive Officer of Kmart, said, "These results reconfirm the significant difficulties Kmart experienced last year, including unsuccessful sales and marketing initiatives, an erosion in supplier confidence, and below-plan sales and earnings performance in the fourth quarter – all of which were factors in the decision to file for Chapter 11 bankruptcy protection. We are moving aggressively to address these challenges."

The decrease in total and same-store sales in 2001 was due primarily to fewer sales transactions resulting from reduced promotional activity and increased competition in the discount retail industry, the deflationary effect of the BlueLight Always program, in which prices were lowered on more than 30,000 high-frequency items, and the effect of prior-year clearance sales of discontinued merchandise. In addition, total sales decreased due to an additional week of sales in fiscal 2000 and the net effect of store openings and closings.

Excluding non-comparable items, gross margin as a percentage of sales was 17.4% in fiscal 2001, compared with 20.9% in 2000. The decline in gross margin rate was driven by a 13.4% rate in the fourth quarter, attributable to the pricing effects of the BlueLight Always program and higher markdowns of seasonal apparel due to unseasonably warm weather. Additionally, in fiscal 2001 Kmart experienced a decrease in vendor allowances of approximately $150 million, primarily due to the erosion in supplier confidence brought on by the events leading up to the Company's bankruptcy filing, an increase in sales of lower-margin food and consumables, an adjustment to inventory for LIFO due to lower inventory levels, partially offset by a decrease in clearance sales in 2001 as compared to 2000 and lower distribution costs under Kmart's arrangement with Fleming.

The increase in Selling, General and Administrative expenses (SG&A) was due primarily to increased expenses for general liability and workers compensation claims, a decrease in recoveries of co-op advertising costs, and increases in employee compensation and utility rates, partially offset by reductions in advertising expenses.

Adamson said, "Last year's financial performance was clearly unacceptable, and we are in the process of implementing a number of initiatives aimed at stabilizing Kmart's operations. Later this year we plan to unveil a new strategic business plan to reposition the Company. In the meantime, we are continuing to place a strong emphasis on reducing costs and generating positive cash flow."

As of May 1, 2002, Kmart had approximately $1.1 billion in available cash and approximately $1.6 billion available under its debtor-in-possession credit facility.

Reconciliation of net loss

The following unaudited table reconciles net loss as reported to net (loss) income adjusted for non-comparable items, income from reorganization items and discontinued operations for the fiscal annual periods ended January 30, 2002 and January 31, 2001, respectively:



 

 

 

(Unaudited)

 

($ Millions, except per share amounts)

 

 

52-weeks Ended

January 30,

2002

 

53-weeks Ended

January 31,

2001

 

 

 

 

 

 

Net loss

 

 

$      (2,418)

 

$          (244)

 

 

 

 

 

 

Non-comparable items:

 

 

 

 

 

   Long-lived asset impairment charge

 

 

            979

 

               -

   Charge for supply chain restructuring

 

 

            163

 

               -

   Charge for BlueLight.com

 

 

              97

 

               -

   Charge for employee severance

and VERP

 

 

             23

 

               -

   Strategic actions charge

 

 

             -

 

              728 

Total non-comparable items

 

 

         1,262

 

              728

Tax benefit

 

 

               -

 

                         (265)

Total non-comparable items, net of tax

 

 

       1,262

 

            463

 

 

 

 

 

 

Reorganization items

 

 

           (184)

 

               -

Discontinued operations

 

 

           (169)

 

               -

FAS 109 valuation allowance (net of portion attributable to non-comparable items, reorganization items and discontinued operations)

 

 

          522

 

            -

 

 

 

 

 

 

Net (loss) income adjusted for non-comparable items, reorganization items and discontinued operations

 

 

$         (987)

 

$            219

 

 

 

 

 

 

EPS as reported

 

 

$        (4.89)

 

$          (0.48)

EPS adjusted for non-comparable items, reorganization items and discontinued operations

 

 

$        (2.00)

 

$           0.47

 

 

 

 

 

 

Basic and diluted weighted average shares (in millions)

 

 

 

           494.1

 

 

           482.8

 

 

 

 

 

 

 

During the 2001 fiscal year, the Company recorded a total of $1.26 billion in non-comparable charges, income of $184 million for reorganization items and income from discontinued operations of $169 million. As previously reported, the Company recorded a $23 million charge ($15 million after-tax) in the first quarter for employee severance and a Voluntary Early Retirement Program (VERP), charges of $92 million ($73 million after-tax) and $5 million ($3 million after-tax) in the second and third quarters, respectively, for BlueLight.com and a $163 million charge ($94 million after-tax) in the third quarter to restructure certain aspects of supply chain operations. In the fourth quarter, the Company recognized income from discontinued operations of $169 million primarily reflecting a reduction in lease obligations for stores previously closed and recorded a non-cash charge of $979 million for the impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In addition, the Company realized gains from reorganization activities of $184 million primarily for the reduction in general liability reserves and lease obligations for stores the Company had closed in prior years, partially offset by expenses for professional service and advisory fees. The Company also recorded a valuation allowance of $958 million on net deferred tax assets in accordance with SFAS No. 109, "Accounting for Income Taxes."

The valuation allowance charge eliminated the tax benefits for non-comparable charges recorded in the first three quarters. Accordingly, on a full-year basis, all fiscal 2001 non-comparable items listed in the table above include no tax benefit.

In fiscal 2000, the Company recorded a non-comparable charge of $728 million ($463 million, after-tax) for a series of strategic actions aimed at strengthening financial performance.

Restatement of Fiscal 2001 Unaudited Quarterly Financial Data

Based on the results of the Company's previously announced investigation of accounting matters conducted under the supervision of the Audit Committee of the Board of Directors, as well as the new management team's review of Kmart's accounting policies and methods, Kmart concluded that (1) an adjustment should be made with respect to an up-front payment in a single vendor transaction that more appropriately should have been deferred and recognized over the life of the contract, and (2) the recording of additional general liability reserves in the fourth quarter was more appropriately designated as a second quarter event. Accordingly, adjustments were made for such transactions, including restatements of previously reported unaudited quarterly financial statements for fiscal 2001 as follows:

  • The first adjustment increased Cost of sales, buying and occupancy, resulting in a net reduction to operating results in the second quarter of $42 million ($28 million, after tax) or $0.06 per share, and an increase in third quarter operating results of $15 million ($10 million, after tax) or $0.02 per share.
  • The second adjustment increased general liability reserves in the second quarter, rather than the fourth quarter, by approximately $167 million ($112 million, after tax), or $0.23 per share through a charge to SG&A.

Additionally, given the Company's bankruptcy filing, and the increased uncertainty and corresponding difficulty in reliably estimating future vendor allowances, Kmart's new management team reviewed the accounting for allowances and concluded that it would be preferable to change the Company's accounting method for interim recognition of cost recoveries from allowances. While this change in method was adopted in the fourth quarter of fiscal 2001, generally accepted accounting principles require the restatement of the first three quarters of fiscal 2001 to reflect this change.

Vendor allowances and rebates are periodic payments received by the Company from vendors in the form of volume or other purchase discounts. This change in methodology does not affect the results that otherwise would have been reported for the full fiscal year, but rather affects the interim recognition of allowances during the year.

Under the new methodology, Kmart will recognize a cost recovery from an allowance only when a formal agreement for such amount is obtained and only to the extent Kmart has fulfilled its performance obligations under the agreement. Previously, Kmart had recorded vendor allowances and rebates during each of the first three quarters based on an estimated annual level of rebates and allowances it expected to receive during the year. These estimates were based on Kmart's historical experience and current understandings with our vendors, and were supplemented by vendor allowances and rebates obtained that were not contemplated in the Company's original estimates. Significant activity occurs in the fourth quarter to finalize outstanding agreements and to collect allowances. Accordingly, under either method, all allowances recognized as of the end of the year are supported by written agreements signed by the vendors.

The following table summarizes unaudited quarterly financial information as previously reported for the first three quarters of fiscal 2001 and as restated to reflect the two accounting adjustments and the change in accounting method for allowances. Embedded in the accounting change that gives effect to the change in interim financial reporting for allowances is an adjustment for an indeterminate amount of supplemental or "incremental" vendor allowances that were initially recorded in the first three quarters prior to having been documented, or otherwise deemed appropriate, pursuant to Kmart's historical policy. Kmart has determined that it is not practical to determine the impact on prior quarters. It should be noted, however, that the restated interim information reflects such allowances only to the extent they are supported by formal agreements or otherwise deemed appropriate in the quarter recognized.



 

2001 Fiscal Quarter

(Unaudited)

 
First
Second
Third

Net Loss Previously Reported

 $             (25)

 $             (95)

 $           (224)

Adjustments:

 

 

 

    Adjustment for Single Vendor Transaction

 

                (42)

                 15

    General Liability Reserve Adjustment

 

              (167)

 

    Accounting Change for Vendor Allowances

              (311)

              (211)

              (32)

   Income Tax Benefit

               103

               138

                 6

Net Loss as Restated

 $          (233)

 $           (377)

 $           (235)

 

 

 

 

Net Loss Per Share:

 

 

 

    As Previously Reported

 $          (0.05)

 $          (0.19)

 $          (0.45)

    As Restated

 $          (0.48)

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