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September 16, 2002

Contact:
Kmart Media Relations:
248-463-1021

For Immediate Release

KMART CORPORATION REPORTS SECOND QUARTER 2002 RESULTS

TROY, Mich., September 16, 2002 -- Kmart Corporation (NYSE: KM) announced today the financial results for its second quarter of fiscal 2002 and the filing of its Quarterly Report on Form 10-Q and monthly operating reports for July and August 2002.

For the 13 weeks ended July 31, 2002, Kmart reported a net loss of $377 million, or $0.75 per share, versus a net loss of $377 million, or $0.77 per share, for the 13 weeks ended August 1, 2001. Excluding non-comparable items, discontinued operations and reorganization items, the Company's net loss was $333 million, or $0.66 per share, in the second quarter of 2002 compared with a net loss of $304 million, or $0.62 per share, in the second quarter of 2001. Net sales for the 13-week period ended July 31, 2002 were $7.52 billion, a decrease of 15.7 percent from $8.92 billion in 2001. As previously reported, Kmart closed 283 underperforming stores in the second quarter. On a same-store basis, sales declined 11.0 percent from the second quarter of 2001.

In its monthly operating report for the period from August 1 to August 28, 2002, Kmart reported a net loss of $126 million on net sales of $2.09 billion. Comparable store sales declined 11.9 percent from the same period a year ago. Kmart also reported that as of August 28, 2002, the Company’s balance sheet cash position was $830 million of which approximately $500 million represents cash at stores and outstanding checks. In addition, Kmart confirmed it had availability under its debtor-in-possession (DIP) facility of approximately $1.5 billion at the end of August.

James B. Adamson, Chairman and Chief Executive Officer of Kmart, said, "We continued to focus in the second quarter of 2002 on stabilizing the business and addressing the operational challenges that have hampered Kmart’s financial performance. However, despite the success of initiatives such as our Customer Appreciation promotion in early June, the Company’s sales have improved slower than we would have liked."

Adamson continued, "At the same time, I want to again emphasize the focused commitment of this management team to work with our employees, vendors, lenders, and other stakeholders to complete our financial and operational restructuring and emerge from Chapter 11 as soon as possible. We are pursuing opportunities to increase store traffic and sales. Recent initiatives include the successful introduction of the JOE BOXER® line of fashion and home furnishings for the back-to-school season and the development of new marketing efforts and exclusive brands designed to appeal to Hispanic customers. We have also moved aggressively to ensure that our cost structure is properly aligned with our revenue base. In August, we announced cost reduction initiatives that are expected to achieve savings of $66 million this year and $130 million in future years."

The Company’s operating results for the second quarter 2002 include charges totaling $90 million for accounting adjustments relating primarily to prior periods. These adjustments include a charge of $57 million to write-off certain costs, commonly referred to as inventory "loads", which had been capitalized into inventory. These costs, which had been recorded for internal reporting purposes, should have been eliminated in the Company's external financial reports.

The Company's Form 10-Q report for the second quarter, filed with the SEC today, reviews certain matters that have been investigated since the filing of its 2001 10-K earlier this year. In particular, the report discusses the premature recording of certain vendor allowances, which had the effect of increasing the reported loss in fiscal year 2001 and reducing the reported loss in fiscal year 2000. No restatement of prior period financial statements was required due to the immaterial effect of such items, particularly in light of Kmart’s filing of a voluntary petition for reorganization under Chapter 11. The 10-Q report also discusses the results of an internal inventory quality review.

Analysis of operations excluding non-comparable items

The following unaudited table reconciles net loss as reported to net loss adjusted for non-comparable items, discontinued operations and reorganization items for the 13 and 26 weeks ended July 31, 2002 and August 1, 2001, respectively:

           
  

Non-comparable items in the second quarter of 2002 include a charge of $15 million related to the cost reduction initiative announced on August 19, 2002; a charge of $27 million related to the write-down of inventory liquidated at the 283 closing stores to net realizable value; and a charge of $9 million primarily related to the accelerated depreciation of supply chain software. Reorganization charges in the second quarter totaled $13 million, including charges of $29 million for professional fees and $37 million for the Key Employee Retention Plan and retention bonuses for associates in the 283 closing stores, partially offset by a gain of $28 million related to the adjustment of estimated allowable lease obligation claims; a gain of $20 million related to the settlement of certain pre-petition obligations (primarily terminated leases); and $5 million of other reorganization income.

The following analysis excludes non-comparable items, discontinued operations, and reorganization items:

Selling, General and Administrative expenses (SG&A) for the second quarter of 2002 decreased by $362 million from the year-ago quarter. SG&A, as a percent of sales, was 21.8 percent in the second quarter of 2002 compared with 22.5 percent in the second quarter of 2001. This decrease is due primarily to decreases in expenses for general liability claims, decreases in payroll, benefits and utilities expense arising from the closure of 283 stores in the second quarter of 2002, lower employee bonus accruals, and lower depreciation expense.

Gross margin as a percentage of sales decreased to 17.6 percent for the 13 weeks ended July 31, 2002, from 18.7 percent in the second quarter of 2001. This decrease is primarily attributable to an increase in clearance markdowns, shrinkage and store rent, partially offset by a decrease in sales of food and consumables, which carry lower margin rates, increased markon on regular sales as a result of the reduction in the BlueLight Always program and a decrease in promotional markdowns.

Six month results

For the 26 weeks ended July 31, 2002, Kmart reported a net loss of $1.826 billion, or $3.63 per share, versus a net loss of $610 million, or $1.25 per share, for the 26 weeks ended August 1, 2001. Excluding non-comparable items, discontinued operations and reorganization items, the Company's net loss was $741 million, or $1.47 per share, in the first half of 2002 compared with a net loss of $522 million, or $1.07 per share, in the same period in 2001.

Net sales for the 26-week period ended July 31, 2002 were $15.16 billion, a decrease of 12.1 percent from $17.25 billion in 2001. On a same-store basis, sales declined 11.4 percent from the first half of 2001.

Kmart Corporation is a mass merchandising company that serves America with more than 1,800 Kmart and Kmart SuperCenter retail outlets. Kmart in 2001 had sales of $36 billion.

Cautionary Statement Regarding Forward-Looking Information

Statements made by Kmart which address activities, events or developments that we expect or anticipate may occur in the future are forward-looking statements. Such forward-looking statements are and will be, as the case may be, subject to many risks and uncertainties, including, but not limited to, Kmart's having filed for bankruptcy and factors relating to Kmart's operations and the business environment in which Kmart operates, which may cause the actual results of Kmart to be materially different from any future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include those set forth in Kmart's Annual Report on Form 10-K for the fiscal year ended January 30, 2002 or in other filings made, from time to time, by Kmart with the Securities and Exchange Commission. The forward-looking statements speak only as of the date when made and Kmart does not undertake to update such statements.

Similarly, these and other factors, including the terms of any reorganization plan ultimately confirmed, can affect the value of our various pre-petition liabilities, common stock and/or other equity securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. A plan of reorganization could result in holders of Kmart common stock receiving no value for their interests. Because of such possibilities, the value of the common stock is highly speculative. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.

           

 

KMART CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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KMART CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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KMART CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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