TROY, MICHIGAN, AUGUST 28, 2003 -- Kmart Holding Corporation (NASDAQ: KMRT) announced today the Company’s financial results for the second quarter of fiscal 2003.

For the 13 weeks ended July 30, 2003, Kmart Holding Corporation (Kmart) reported a net loss of $5 million, or ($0.06) per share. Kmart Corporation reported a net loss of $293 million for the 13 weeks ended July 31, 2002 ¹.

Income before interest, reorganization items, income taxes and discontinued operations was $8 million for the second quarter of 2003, versus a loss of $264 million in the same period a year ago. Last year’s results include a charge of $27 million in the second quarter of 2002 in connection with store closing liquidation sales. This charge is included in the Cost of sales, buying and occupancy in the accompanying unaudited Condensed Consolidated Statements of Operations.

Net sales for the 13 weeks ended July 30, 2003, were $5.652 billion, a decrease of 21.3 percent from $7.183 billion a year ago. On a same-store basis, sales declined 5.4 percent for the second quarter of 2003, compared to the second quarter of 2002.

Julian C. Day, President and Chief Executive Officer of Kmart, said: “We are pleased with the progress we continue to make in our business. We are focused on profitable sales, reducing SG&A and enhancing the productivity of our assets. As a result, our liquidity position remains strong.”

As of July 30, 2003, Kmart had approximately $1.2 billion in cash and cash equivalents, and borrowing availability of approximately $1.5 billion on its $2 billion credit facility inclusive of outstanding letters of credit. In light of its favorable liquidity position, the Company is exploring various alternatives to reduce the cost of its Exit Financing Facility.

Gross margin decreased $37 million to $1.234 billion, for the 13 weeks ended July 30, 2003, from $1.271 billion for the 13 weeks ended July 31, 2002. Gross margin, as a percentage of sales, increased to 21.8% for the 13 weeks ended July 30, 2003, from 17.7% for the comparable period in the prior year. The improvement in the gross margin rate is attributable to a decrease in shrinkage and an overall improvement in the Company’s sales mix. In addition, the gross margin rate was positively affected by the termination of the Company’s supply arrangement with Fleming, lower buying and occupancy expenses as a result of the write-off of long-lived assets in conjunction with the application of Fresh-Start accounting and the effect of co-op recoveries recorded in Cost of sales, buying and occupancy in 2003. Previously, co-op recoveries were recorded in Selling, general and administrative expenses (“SG&A”) prior to the adoption in the fourth quarter of 2002 of EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” These improvements in the gross margin rate were partially offset by the impact of clearance markdowns.

Selling, general and administrative expenses (SG&A), which includes advertising costs (net of co-op recoveries of $91 million in 2002), decreased $307 million to $1.228 billion for the 13 weeks ended July 30, 2003 from $1.535 billion for the 13 weeks ended July 31, 2002. The decrease in SG&A is primarily due to the reduction in the Company’s store base after closing 599 stores during fiscal 2002 and the first quarter of 2003, as well as a decrease in payroll and other related expenses from corporate headquarters cost reduction initiatives and lower depreciation expense due to adjustments to the book value of the Company’s property and equipment, resulting from impairment charges taken while operating in bankruptcy and the write-off of long-lived assets in conjunction with Fresh-Start accounting. Collectively, these reductions were partially offset by an increase in workers’ compensation expense and the impact of the reclassification of co-op recoveries as discussed above. SG&A, as a percentage of sales, increased to 21.7% for the 13 weeks ended July 30, 2003, from 21.4% for the comparable period in the prior year.

Disclosure of Financial Information in Accordance with Regulation FD

Year-to-date Adjusted EBITDA

Year-to-date Adjusted EBITDA was $164 million. Disclosure of Year-to-date Adjusted EBITDA is being made for purposes of communicating to employees year-to-date performance results as compared to the performance goals outlined in the Company’s incentive compensation program, and accordingly, to comply with the disclosure requirements under Regulation FD.

Year-to-date Adjusted EBITDA (Year-to-date earnings before interest, taxes, depreciation, amortization, reorganization costs, fresh start valuation charges, restructuring, impairment and other charges and other bankruptcy-related items) is a non-GAAP financial measure. Year-to-date Adjusted EBITDA is not the same as EBITDA defined in Kmart’s Exit Financing Facility. Year-to-date Adjusted EBITDA is a Company-defined metric used solely by Kmart’s management for the administration of the Company’s incentive compensation program for eligible employees. Year-to-date Adjusted EBITDA is not a measure or indicator of the overall financial condition or performance of Kmart and should not be used by investors as a basis for formulating investment decisions. Set forth below and as required under Regulation G, is a reconciliation of the Condensed Consolidated Statements of Operations to Year-to-date Adjusted EBITDA:

 

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
(Unaudited)

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)

 

Footnote 1:

Upon emergence from bankruptcy on May 6, 2003, Kmart Corporation (Predecessor Company) applied the provisions of Fresh-Start accounting effective as of April 30, 2003, at which time a new reporting entity, Kmart Holding Corporation (Kmart), was deemed to be created. As a result of applying Fresh-Start accounting, the reported historical financial statements of the Predecessor Company for periods ended prior to May 1, 2003 generally are not comparable to those of Kmart. Therefore, comparisons of earnings per share data are not included herein. As referenced within this news release, results of operations for the 13 weeks ended April 30, 2003 and periods ended in fiscal 2002 refer to the Predecessor Company

Board Approves up to $10 million Share Repurchase

The Board of Directors today approved the repurchase of up to $10 million of the Company’s outstanding stock for the purpose of providing restricted stock grants to certain employees. The repurchase was subject to an amendment to the Credit Agreement of our Exit Financing Facility, the approval of which was obtained today. Certain of such restricted stock grants may be subject to shareholder approval.

Kmart and its subsidiaries (together, “the Company”) is a mass merchandising company that offers customers quality products through a portfolio of exclusive brands that include DISNEY, JACLYN SMITH, JOE BOXER, KATHY IRELAND, MARTHA STEWART EVERYDAY, ROUTE 66, SESAME STREET, and THALIA SODI. The Company operates more than 1,500 stores in 49 states and is one of the 10 largest employers in the country with 170,000 associates. For more information visit the Company’s website at www.kmart.com.

Cautionary Statement Regarding Forward-Looking Information and Other Matters
Statements made by Kmart which address activities, events or developments that we expect or anticipate may occur in the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect Kmart’s current views with respect to current events and financial performance. Such forward-looking statements are based upon assumptions concerning future conditions that may ultimately prove to be inaccurate and involve risks, uncertainties and factors that could cause actual results to differ materially from any anticipated future results, express or implied, by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, factors relating to Kmart’s internal operations and the external environment in which it operates; marketplace demand for the products of Kmart’s key brand partners as well as the engagement of appropriate new brand partners; increasing competition from other retailers; Kmart’s ability to operate pursuant to its exit financing facility; outcome of negotiations on collective bargaining agreements and other labor issues with unions representing employees in our distribution centers; Kmart’s ability to obtain and maintain normal terms with its vendors, attract and retain customers, obtain and maintain appropriate inventory, implement its business plan and strategies, attract, motivate and/or retain key executives and associates; and other risks detailed in Kmart’s Securities and Exchange Commission filings. Kmart undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances after the date such statements were made.