Kmart Holding Corporation (NASDAQ: KMRT) announced today the Company's financial results for the third quarter of fiscal 2003.
For the 13 weeks ended October 29, 2003, Kmart Holding Corporation (Kmart) reported a net loss of $23 million, or ($0.26) per share. Kmart Corporation reported a net loss of $383 million for the 13 weeks ended October 30, 2002(1).
Loss before interest, reorganization items, income taxes and discontinued operations was $10 million for the third quarter of 2003, versus a loss of $328 million in the same period a year ago.
Net sales for the 13 weeks ended October 29, 2003, were $5.092 billion, a decrease of 21.2 percent from $6.459 billion a year ago. On a same-store basis, sales declined 8.6 percent for the third quarter of 2003, compared to the third quarter of 2002. The decrease in same-store sales is due primarily to the year-over-year comparison with several Company-wide promotional events that were taking place a year ago, and the reduction in the frequency of mid- week advertising circulars in the current year. The decrease in total sales is attributable to the decrease in same-store sales and the closure of 316 stores during the first quarter of fiscal 2003.
Julian C. Day, President and Chief Executive Officer of Kmart, said: "We continue to actively manage our business in a disciplined fashion steadily increasing our margin realization, reducing operating costs, enhancing the productivity of our assets and improving the overall store experience for our customers. Our focus on profitable sales and a consequent reduction in losses from clearance sales and promotional events resulted in a decrease in same- store sales in the third quarter. The actions we have taken to drive profitability contributed to a mid-teens decline in November same-store sales, but allowed us to operate the Company profitably in November 2003." Last year the Company reported a loss for November (neither period included the Thanksgiving Holiday weekend).
As of October 29, 2003, Kmart had approximately $0.9 billion in cash and cash equivalents, and borrowing availability of approximately $1.6 billion on its $2 billion credit facility inclusive of outstanding letters of credit. In light of its favorable liquidity position, the Company has since voluntarily reduced the size of its credit facility to $1.5 billion to reduce the overall cost of the facility.
Day added, "The strength of our liquidity position is especially noteworthy, as we have progressed through the peak buying period for the holiday season with no direct borrowings drawn from our credit facility. In fact, at our point of lowest liquidity, the Company had over $800 million in cash and cash equivalents."
Gross margin increased $61 million to $1.167 billion, for the 13 weeks ended October 29, 2003, from $1.106 billion for the 13 weeks ended October 30, 2002. Gross margin, as a percentage of sales, increased to 22.9 percent for the 13 weeks ended October 29, 2003, from 17.1 percent for the comparable period in the prior year. The overall improvement in gross margin rate is primarily attributable to lower distribution costs as a result of the Company's in-sourcing of pantry, food and consumable products, lower depreciation expense resulting from impairment charges taken while operating in bankruptcy and as a result of the write-off of long-lived assets in conjunction with the application of Fresh-Start accounting. A lower rate of inventory shrinkage, supplier cost reductions and an improved sales mix stemming from a significant decrease in promotional sales events and mid-week circulars also contributed to the margin improvement. Gross margin also benefited from the reclassification of co-op advertising recoveries recorded in Cost of sales, buying and occupancy in 2003, as required under generally accepted accounting principles. 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 $108 million in 2002), decreased $270 million to $1.178 billion for the 13 weeks ended October 29, 2003 compared to $1.448 billion for the 13 weeks ended October 30, 2002. The decrease in SG&A is primarily due to the reduction of the Company's store base after closing 316 stores during the first quarter of fiscal 2003, as well as a decrease in payroll and other related expenses from corporate headquarters' cost reduction initiatives. In addition, lower depreciation expense resulting from impairment charges taken while operating in bankruptcy and the write-off of long-lived assets in conjunction with Fresh-Start accounting combined with a decrease in advertising expense contributed to the improvement in SG&A expenses. Collectively, these reductions were partially offset by the impact of the reclassification of co-op recoveries, as discussed above. SG&A, as a percentage of sales, increased to 23.1 percent for the 13 weeks ended October 29, 2003, from 22.4 percent for the comparable period in the prior year. As a percent of sales, the increase is due primarily to the reclassification of co- op advertising recoveries as discussed above.
Disclosure of Financial Information in Accordance with Regulation FD Year-to-date Adjusted EBITDA
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) was $166 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 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. 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:
Net loss for the 13 weeks ended October 29, 2003 (Successor) $(23) Net loss for the 13 weeks ended July 30, 2003 (Successor) (5) Net loss for the 13 weeks ended April 30, 2003 (Predecessor) (862) (890) Year-to-date adjustments to reconcile Net Loss for the 26 weeks ended October 29, 2003 and the 13 weeks ended April 30, 2003 to year-to-date adjusted EBITDA: Discontinued operations 10 Interest expense, net 102 Benefit from income taxes (21) Depreciation and amortization 141 Reorganization items, net 769 Restructuring, impairment and other charges 37 Post-emergence bankruptcy-related items, net 27 Other 1 Year-to-date adjusted EBITDA $166 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions, except per share data) (Unaudited) Successor Prede- Successor Prede- Prede- cessor cessor cessor Company Company Company Company Company 13-Weeks 13-Weeks 26-Weeks 13-Weeks 39-Weeks Ended Ended Ended Ended Ended October October October April October 29, 2003 30, 2002 29, 2003 30, 2003 30, 2002 Sales $5,092 $6,459 $10,744 $6,181 $20,823 Cost of sales, buying and occupancy 3,925 5,353 8,344 4,762 17,784 Gross margin 1,167 1,106 2,400 1,419 3,039 Selling, general and administrative expenses 1,178 1,448 2,401 1,421 4,653 Restructuring, impairment and other charges - (6) - 37 8 Equity income in unconsolidated subsidiaries (1) (8) (3) (7) (27) (Loss) income before interest, reorganization items, income taxes and discontinued operations (10) (328) 2 (32) (1,595) Interest expense, net 24 37 45 57 102 Reorganization items, net - 4 - 769 259 Benefit from income taxes (11) (7) (15) (6) (19) Loss before discontinued operations (23) (362) (28) (852) (1,937) Discontinued operations (net of income taxes of $0, $0 and $0, respectively) - (21) - (10) (181) Net loss $(23) $(383) $(28) $(862) $(2,118) Basic/diluted loss before discontinued operations $(0.26) $(0.72) $(0.32) $(1.63) $(3.85) Discontinued operations - (0.04) - (0.02) (0.36) Basic/diluted net loss per common share $(0.26) $(0.76) $(0.32) $(1.65) $(4.21) Basic/diluted weighted average shares (millions) 89.6 502.5 89.6 522.7 502.7 CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions, except share data) (Unaudited) Successor Predecessor Company Company October 29, January 29, October 30, 2003 2003 2002 ASSETS Current Assets Cash and cash equivalents $941 $613 $381 Merchandise inventories 4,404 4,825 6,330 Other current assets 552 664 687 Total current assets 5,897 6,102 7,398 Property and equipment, net 115 4,892 5,764 Other assets and deferred charges 105 244 230 Total Assets $6,117 $11,238 $13,392 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities Long-term debt due within one year $61 $ - $ - Accounts payable 1,203 1,248 1,825 Accrued payroll and other liabilities 733 710 691 Taxes other than income taxes 295 162 306 Total current liabilities 2,292 2,120 2,822 Long-term Liabilities Long-term debt and mortgages payable 24 - 575 Capital lease obligations 419 623 660 Pension obligation 867 - - Unfavorable operating leases 322 - - Other long-term liabilities 486 181 209 Total long-term liabilities 2,118 804 1,444 Total liabilities not subject to compromise 4,410 2,924 4,266 Liabilities subject to compromise - 7,969 7,128 Predecessor Company obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely 7 3/4% convertible junior subordinated debentures (redemption value $648 and $883, respectively) - 646 874 Shareholders' Equity (Deficit) Successor Company preferred stock 20,000,000 shares authorized; no shares outstanding - - - Predecessor Company common stock $1 par value, 1,500,000,000 shares authorized; 519,123,988 and 503,458,279 shares outstanding, respectively - 519 503 Successor Company common stock $0.01 par value, 500,000,000 shares authorized; 89,655,445 shares outstanding 1 - - Capital in excess of par value 1,735 1,922 1,709 Treasury stock, at cost (1) - - Accumulated deficit (28) (2,742) (1,088) Total shareholders' equity (deficit) 1,707 (301) 1,124 Total Liabilities and Shareholders' Equity (Deficit) $6,117 $11,238 $13,392 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited) Successor Company Predecessor Company 26-Weeks 13-Weeks 39-Weeks Ended Ended Ended October 29, April 30, October 30, 2003 2003 2002 Cash Flows From Operating Activities Net loss $(28) $(862) $(2,118) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Restructuring, impairments and other charges - 44 788 Reorganization items, net - 769 278 Depreciation and amortization 10 177 558 Equity income in unconsolidated subsidiaries (3) (7) (27) Dividends received from Meldisco - 36 45 Cash used for store closings and other charges (11) (64) (147) Cash used for payments of exit costs and other reorganization items (470) (19) (113) Change in: Inventories 27 480 (1,202) Accounts payable 43 (117) 859 Deferred income taxes and taxes payable (4) (16) (23) Other assets (10) 123 49 Other liabilities 50 32 252 Net cash (used for) provided by operating activities (396) 576 (801) Cash Flows From Investing Activities Proceeds from sale of property and equipment 93 64 13 Capital expenditures (61) (4) (206) Net cash provided by (used for) investing activities 32 60 (193) Cash Flows From Financing Activities Proceeds from issuance of debt 60 - - Proceeds from DIP Credit Facility - - 245 Payments on debt (36) (1) (22) Purchase of treasury stock (3) - - Debt issuance costs (46) - (36) Payments on capital lease obligations (29) (16) (57) Fees paid to Plan Investors (13) - - Issuance of common shares 140 - - Net cash provided by (used for) financing activities 73 (17) 130 Net change in cash and cash equivalents (291) 619 (864) Cash and cash equivalents, beginning of period 1,232 613 1,245 Cash and cash equivalents, end of period $941 $1,232 $381 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.
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, DISNEY, JACLYN SMITH, JOE BOXER, KATHY IRELAND, MARTHA STEWART EVERYDAY, ROUTE 66 and SESAME STREET. Kmart 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 credit 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.
SOURCE: Kmart Holding Corporation
CONTACT: Kmart Media Relations, +1-248-463-1021, or Kmart Investor
Web site: http://www.kmart.com/