More than eight months after filing for Chapter 11 bankruptcy protection, Kmart's much-hyped restructuring plan has accomplished little for the ailing retailer. After recent announcements regarding further debt extensions as well as additional layoffs, Kmart may have a difficult road to recovery.
Since announcing its bankruptcy filing in January, Kmart Corporation has closed nearly 300 stores, slashed more than 22,000 jobs and ushered in scores of management teams to overhaul the company -- efforts which have not brought the dramatic turnaround executives had hoped.
The company posted first quarter net losses of $1.45 billion, and earlier this month, Kmart filed a motion with an Illinois bankruptcy court seeking to amend the company's already staggering $2 billion debt by an amount not to exceed $500 million.
Although Kmart's increasing debt burden does not indicate a successful restructuring strategy, its request for more credit suggests that its corporate management is serious about the company's survival, Darden Prof. Robert F. Bruner said.
Kmart executives also announced last week that the company would fire 450 workers, eliminate 100 open positions and phase-out 130 contract positions. The 700 additional job cuts will save an additional $66 million for the 2002 fiscal year and $130 million annually.
Kmart's cost-saving measures merely help to minimize its cash flow, resulting in a slimmer, hopefully more profitable and efficient company, Bruner said.
"But Kmart needs to go farther, to reinvent its business model," he said. "Wal-Mart and other retailers operate very differently and successfully. Kmart needs to learn from the competition and fundamentally reinvent itself."
Kmart ultimately needs to establish a niche market, appealing to a specific consumer group. While Wal-Mart attracts economical customers and Target markets toward a younger and trendier consumer, Kmart has floundered with its identity, Commerce Prof. Gayle Erwin said.
Kmart "has a split personality," Erwin said. It "attempted to attract price-sensitive consumers by bringing back the blue-light special, which failed, and [it] is attempting to attract a trendier consumer with its Martha Stewart line. As a result, [Kmart] is unfocused and consumers don't really know what to expect when they walk into a store."
Technically, Kmart should look to reorganize its capitalization, which may include surrendering ownership to creditors, rescheduling interest and principal payments as well as defaulting on corporate obligations, Bruner said.
Executives also would benefit by refinancing its operations to attract investors in addition to recruiting new corporate leaders seasoned in dealing with financially distressed firms, Erwin said.
While Kmart's struggle partially reflects the current economic recession, its return to profitability hinges on emerging from bankruptcy, operational restructuring and a healthier economic environment. A best-case scenario would see the beginning of Kmart's resurgence in less than a year. Bankruptcy cases, however, have been known to take years to reach conclusion, Bruner said.
"As for a return to profitability, that's a tougher call," he said. "But I doubt that capital markets will let the firm stagger on with losses for very long."
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