Kmart Holding Corporation Reports Net Income of $155 Million for the Second Quarter of Fiscal 2004
Kmart Holding Corporation (NASDAQ: KMRT) today reported financial results for the second quarter of fiscal 2004. For the 13 weeks ended July 28, 2004, Kmart Holding Corporation (Kmart or the Company) reported net income of $155 million, or $1.54 per diluted share. The Company reported a net loss of $5 million or $(0.06) per diluted share for the same period in 2003.
Operating income for the 13 weeks ended July 28, 2004 was $275 million or 5.7% of sales compared to $10 million or 0.2% of sales for the same period in 2003. Operating income for the 13 weeks ended July 28, 2004 included net gains on sales of assets of $72 million. Same-store sales and total sales decreased 14.9% and 15.3%, respectively, for the 13 weeks ended July 28, 2004, compared to the 13 weeks ended July 30, 2003.
For the 26 weeks ended July 28, 2004 Kmart reported net income of $248 million, or $2.47 per diluted share.
During the quarter, cash and cash equivalents increased approximately $400 million to a total of $2.6 billion as of July 28, 2004.
Julian C. Day, President and Chief Executive Officer of Kmart, said "We are pleased with our continued progress and ability to deliver consistent profit. We have continued to focus on process changes that simplify the operations of our stores and distribution centers, including improving merchandise flow and lowering inventory levels which result in lower shrink expense, lower clearance and promotional markdowns and lower payroll expenses."
Day added, "We are happy with the dramatically improved styling and quality of our recently launched fall product lines, and how they have been brought to life through marketing partnerships such as those with E! Entertainment and The WB Network. We will continue our attention on our stores, product assortment, and the quality of our customers' shopping experience, and remain focused on those strategies that have contributed to the improved performance of the Company."
Management's Discussion and Analysis of Operations
Factors affecting same-store sales and total sales for the 13 weeks ended July 28, 2004 included reductions in promotional events and newspaper advertising; the effect of unseasonably cool weather in the current quarter on sales of summer seasonal products including lawn and garden merchandise; and a transition in our apparel lines leading up to back-to-school product launches.
Gross margin increased $9 million to $1.24 billion for the 13 weeks ended July 28, 2004 from $1.23 billion for the 13 weeks ended July 30, 2003. Gross margin as a percentage of sales increased to 26.0% for the 13 weeks ended July 28, 2004, from 21.8% in the prior year. The improvement in the Company's gross margin rate was primarily attributable to reduced markdowns on promotions and clearance items, and improvements in shrinkage at our distribution centers and stores. Included in gross margin was a $16 million charge recorded in the second quarter of fiscal 2004 in conjunction with the store closings inventory liquidations.
Selling, general and administrative expenses (SG&A) decreased $186 million to $1.04 billion, or 21.7%, of sales for the 13 weeks ended July 28, 2004 from $1.23 billion, also 21.7% of sales, for the 13 weeks ended July 30, 2003. The decline resulted from a reduction in store payroll and related expenditures due to increased operating efficiencies and reduced sales volume at our stores, and to reductions in the Company's weekly and mid-week circular advertising, partially offset by an increase in electronic media advertising. The remaining net reduction in SG&A is due to continued efforts to reduce operating expenses.
Interest expense, net for the 13 weeks ended July 28, 2004 and July 30, 2003 was $31 million and $21 million, respectively. In July 2004, the Company voluntarily reduced the size of our credit agreement from $1.5 billion to $1.0 billion to reduce the overall cost of the facility. In conjunction with this action, the Company accelerated the amortization of $9 million of the associated debt issuance costs, which is included in Interest expense, net for the 13 weeks ended July 28, 2004. During the 13 weeks ended July 28, 2004, $13 million of interest expense was recorded for the accretion of obligations recorded at net present value.
Discussion of Non-GAAP Financial Information Year-to-date Adjusted EBITDA
Year-to-date Adjusted EBITDA (Year-to-date earnings before interest, taxes, depreciation, amortization, net gains on sales of assets, bankruptcy- related recoveries and certain other items) is a non-GAAP financial measure. Year-to-date Adjusted EBITDA is not the same as EBITDA defined in Kmart's credit 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 as it excludes a number of important cash and non-cash recurring items. Management compensates for this limitation by using GAAP measures, as well, in managing the business.
26-Weeks
Ended
July 28, 2004
Net income $248
Adjustments to reconcile to Year-to-date Adjusted EBITDA:
Income tax provision 150
Interest expense, net 57
Depreciation and amortization 8
Net gains on sales of assets (104)
Bankruptcy-related recoveries (12)
Other 34
Year-to-date Adjusted EBITDA $381
Comparability of Financial Statements:
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 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 to Predecessor Company results are not included herein. As referenced within this news release, results of operations for the period ended April 30, 2003, refer to the Predecessor Company.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
13-Weeks Ended 13-Weeks Ended
July 28, 2004 July 30, 2003
Sales $4,785 $5,652
Cost of sales, buying and occupancy 3,543 4,419
Gross margin 1,242 1,233
Selling, general and administrative
expenses 1,039 1,225
Net gains on sales of assets (72) (2)
Operating income 275 10
Interest expense, net 31 21
Bankruptcy-related recoveries (5) -
Equity income in unconsolidated
subsidiaries - (2)
Income (loss) from operations before
income taxes 249 (9)
Provision for (benefit from) income taxes 94 (4)
Net income (loss) $155 $(5)
Basic net income (loss) per common share $1.73 $(0.06)
Diluted net income (loss) per common share $1.54 $(0.06)
Basic weighted average shares (millions) 89.5 89.7
Diluted weighted average shares (millions) 101.5 89.7
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
(Unaudited)
July 28, January 28, July 30,
2004 2004 2003
ASSETS
Current Assets
Cash and cash equivalents $2,626 $2,088 $1,200
Merchandise inventories 3,212 3,238 4,063
Accounts receivable, net 225 301 305
Other current assets 130 184 254
Total current assets 6,193 5,811 5,822
Property and equipment, net 240 153 43
Other assets and deferred
charges 212 120 90
Total Assets $6,645 $6,084 $5,955
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Long-term debt and mortgages
payable due within one year $4 $4 $66
Accounts payable 977 820 1,083
Accrued payroll and other
liabilities 772 671 636
Taxes other than income taxes 291 281 333
Total current liabilities 2,044 1,776 2,118
Long-term Liabilities
Long-term debt and mortgages
payable 103 103 51
Capital lease obligations 335 374 401
Pension obligations 880 873 861
Unfavorable operating leases 316 342 334
Other long-term liabilities 430 424 482
Total liabilities 4,108 3,892 4,247
Shareholders' Equity
Preferred stock 20,000,000
shares authorized; no shares
outstanding - - -
Common stock $0.01 par value,
500,000,000 shares authorized;
89,647,641, 89,633,760 and
89,677,509 shares issued,
respectively 1 1 1
Treasury stock, at cost (1) (1) -
Capital in excess of par value 2,041 1,943 1,712
Retained earnings (Accumulated
deficit) 496 248 (5)
Accumulated other comprehensive
income - 1 -
Total shareholders' equity 2,537 2,192 1,708
Total Liabilities and
Shareholders' Equity $6,645 $6,084 $5,955
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Predecessor
Successor Company Company
26-Weeks 13-Weeks 13-Weeks
Ended Ended Ended
July 28, 2004 July 30, 2003 April 30, 2003
Cash Flows From Operating
Activities
Net income (loss) $248 $(5) $(862)
Adjustments to reconcile net
income (loss) to net cash
provided by (used for)
operating activities:
Depreciation and
amortization 24 5 177
Store closings inventory
charges 17 - -
Net gains on sales
of assets (104) (2) -
Deferred income taxes 22 - -
Equity income in
unconsolidated
subsidiaries (3) (2) (7)
Restructuring,
impairments and
other charges - - 44
Reorganization items, net - - 769
Dividends received from
Meldisco 3 - 36
Cash used for store closings
and other charges - (5) (64)
Cash used for payments of exit
costs and other
reorganization items - (451) (19)
Change in:
Merchandise inventories 10 368 480
Accounts receivable 41 75 114
Accounts payable 156 (77) (117)
Taxes payable 133 (11) (16)
Other assets 13 26 9
Other liabilities (24) (93) 32
Net cash provided by (used for)
operating activities 536 (172) 576
Cash Flows From Investing
Activities
Proceeds from sales of assets 153 44 64
Capital expenditures (124) (27) (4)
Net cash provided by investing
activities 29 17 60
Cash Flows From Financing
Activities
Payments on capital lease
obligations (25) (14) (16)
Payments on mortgages (2) (4) (1)
Proceeds from issuance of
debt - 60 -
Debt issuance costs - (46) -
Fees paid to Plan Investors - (13) -
Issuance of common shares - 140 -
Net cash (used for) provided by
financing activities (27) 123 (17)
Net change in cash and cash
equivalents 538 (32) 619
Cash and cash equivalents,
beginning of period 2,088 1,232 613
Cash and cash equivalents,
end of period $2,626 $1,200 $1,232
About Kmart Holding Corporation
Kmart Holding Corporation (NASDAQ: KMRT) and its subsidiaries (together, "Kmart") is a mass merchandising company that offers customers quality products through a portfolio of exclusive brands that include Thalia Sodi, Jaclyn Smith, Joe Boxer, Kathy Ireland, Martha Stewart Everyday, Route 66 and Sesame Street. For more information visit the Company's website at http://www.kmart.com/ .
Cautionary Statement Regarding Forward-Looking Information and Other Matters
Statements or reports made by or on behalf of 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, when made, 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; Kmart's ability to successfully implement business strategies and otherwise fund and execute planned changes in various aspects of the business; marketplace demand for the products of Kmart's key brand partners, as well as the engagement of appropriate new brand partners; changes in consumer spending and Kmart's ability to anticipate buying patterns and implement appropriate inventory strategies; Kmart's ability to reverse its negative same-store sales trend; competitive pressures and other third party actions, including pressures from pricing and other promotional activities of competitors, as well as new competitive store openings; the resolution of allowed claims for which Kmart is obligated to pay cash under the Plan of Reorganization; Kmart's ability to properly monitor its inventory needs in order to timely acquire desired goods in appropriate quantities and/or fulfill labor needs at planned costs; Kmart's ability to attract and retain customers; Kmart's ability to maintain normal terms with vendors and service providers; Kmart's ability to maintain contracts, including leases, that are critical to its operations; Kmart's ability to develop a market niche; regulatory and legal developments; general economic conditions; weather conditions, including those which affect buying patterns of Kmart's customers; other factors affecting business beyond Kmart's control; Kmart's ability to 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.
SOURCE: Kmart Holding Corporation
CONTACT: Kmart Media Relations, +1-248-463-1021
Web site: http://www.kmart.com/