Kmart, the US's second-largest discount store chain, filed for bankruptcy protection yesterday, as its cash reserves ran out following a dismal holiday sales season and stiff competition from rival Wal-Mart.
The Kmart bankruptcy, the biggest retail failure in US history, was precipitated indirectly by the spectacular collapse of the energy-trading company Enron in November, which was the biggest corporate bankruptcy.
Enron's collapse promoted insurance firms to raise the price of surety bonds issued to companies like Kmart to cover liabilities, and to ask for cash collateral, draining further Kmart's cash flow.
Kmart's 2,114 stores will continue trading as it tries to re-organise and emerge from bankruptcy in 2003, but the future of all the stores is now under review.
The company began business 102 years ago as a "five-and-dime" store in Detroit, Michigan.
Known originally as SS Kresge, it opened the first Kmart discount store in Garden City Michigan in 1964.
It subsequently acquired various household-name retailers including Borders Bookstore chain, Waldenbooks, Builders Square and Payless drug stores.
The company, which fired its president Mr Mark Schwartz last week and named Mr James Adamson chairman, said it had secured $2 billion (€2.3 billion) in debtor-in-possession financing, which allows it to operate while re-organising. It said it hoped to emerge from bankruptcy in 2003.
A key factor in Kmart's future will be its ability to retain its star retail attraction, Martha Stewart, whose name and brand image are synonymous with the chain. Martha Stewart's linens and kitchenware generate more than $1 billion a year in sales, and help Kmart distinguish itself from Wal-Mart and Target, which have eaten into Kmart sales.
The decision to seek bankruptcy was based on a rapid decline in its liquidity resulting from Kmart's below-plan sales and earnings in the fourth quarter, the evaporation of the surety bond market and an erosion of supplier confidence, the company said.
On Monday, Fleming Company, Kmart's sole grocery supplier, suspended shipments after Kmart failed to make a regular weekly payment. Scotts, a maker of lawn and garden products, also said it stopped shipments to all Kmart stores. The financing deal means vendors can resume shipping goods to Kmart as they will be sure of getting paid.
Kmart and its US subsidiaries listed assets of $17 billion at book value and liabilities of $11.3 billion at the end of the fiscal quarter to October 31st, 2001.
