Kmart Corporation Reports Third Quarter 2002 Results

Kmart Corporation (Pink Sheets: KMRTQ) announced today the financial results for its third quarter of fiscal 2002 and the filing of its Quarterly Report on Form 10-Q and monthly operating reports for October and November 2002.

For the 13 weeks ended October 30, 2002, Kmart reported a net loss of $383 million, or $0.76 per share, versus a restated net loss of $249 million, or $0.50 per share, for the 13 weeks ended October 31, 2001. Excluding non- comparable items, discontinued operations and reorganization items, the Company's net loss was $390 million, or $0.78 per share, in the third quarter of 2002, compared with a net loss of $152 million, or $0.31 per share, in the third quarter of 2001.

The reported results reflect the restatement of the 26-week period ended July 31, 2002, as well as prior fiscal years. Kmart announced on December 9, 2002, that it would be restating its financial results for these prior periods to reflect certain adjustments identified as a result of the Company's ongoing review of its accounting practices and procedures. (These adjustments and the restatement of the prior periods are discussed below.)

Net sales for the 2002 third quarter were $6.73 billion, compared with $8.02 billion in the same quarter a year ago. As previously reported, Kmart closed 283 underperforming stores in the second quarter of 2002. On a same- store basis, sales declined 7.6 percent from the third quarter of 2001. Comparable store sales for the four-week period ended October 30, 2002, were 3.9 percent lower than the same period a year ago.

The Company passed the peak borrowing period for its seasonal inventory build in early December and has now fully repaid all of it DIP borrowings. As of December 19, 2002, Kmart had no borrowings outstanding and had utilized $326 million of its Debtor in Possession (DIP) credit facility for letters of credit. Its total DIP availability as of that date was $1.57 billion.

James B. Adamson, Chairman and Chief Executive Officer of Kmart, said, "We continue to make good progress in many areas. Our reorganization team is hard at work finalizing a comprehensive business plan, analyzing our store base and taking other actions necessary to fulfill our goal of filing a proposed plan of reorganization with the court and emerging from Chapter 11 court protection as early as practicable in 2003."

November Results and Holiday Outlook

In its monthly operating report for the four-week period ended November 27, 2002, Kmart reported a net loss of $40 million on net sales of $2.47 billion. Comparable store sales during this period were 17.2 percent lower than the same period a year ago. In contrast to many other retailers, Kmart's fiscal period ends on the last Wednesday of the month. Accordingly, the reporting period for November 2002 does not include the sales results of Thanksgiving weekend, as it did in 2001, which resulted in an unfavorable comparison.

Kmart's 2002 Thanksgiving weekend sales will be included in the December monthly results. As a result, the Company expects its comparable sales trend for December to improve from November. However, the Company's overall results for the fourth quarter of 2002 may be adversely impacted by the fact that there are significantly fewer shopping days between Thanksgiving and Christmas this year as compared with 2001. In addition, the Company noted that the U.S. retail environment has generally been described as weak this holiday season.

Julian Day, Kmart President and Chief Operating Officer, said, "The Company's performance over Thanksgiving weekend was encouraging. The post- Thanksgiving period also started strong, but sales in the last two weeks have been softer than we had anticipated."

Day continued, "In addition to concentrating on our same store sales performance, we remain very focused on improving our gross margin management process, working on our cost base and increasing our inventory turns. Our challenge as a promotional retailer is to use aggressive event and pricing strategies aimed at driving store traffic and winning our customers back, while also providing a merchandise assortment that allows us to generate an acceptable margin rate. We are encouraged by consumer reaction to our exclusive merchandise offerings -- including the new JOE BOXER and Martha Stewart Everyday Holiday collections -- that were available to our customers this holiday season."

Analysis of Operations Excluding Non-comparable Items

The following unaudited table reconciles net loss as reported to net loss adjusted for non-comparable items, discontinued operations and reorganization items for the 13 weeks and 39 weeks ended October 30, 2002 and October 31, 2001, respectively:

                                  (Unaudited)            (Unaudited)
   (Dollars in millions,
   except per share data)    13 Weeks    13 Weeks    39 Weeks   39 Weeks
                              Ended       Ended       Ended      Ended
                           October 30,  October 31, October 30, October 31,
                               2002        2001        2002       2001

  Net loss, as reported       $(383)      $(249)    $(2,118)     $(796)

  Gain from discontinued
   operations                     1           -          37          -

  Net loss from continuing
   operations                  (384)       (249)     (2,155)      (796)

  Non-comparable items:

    2002 inventory markdowns      -           -         785          -

    Accelerated depreciation on
     closed store assets          -           -          18          -

    2002 cost reduction
     initiative                   -           -          15          -

    Charge for supply chain
     restructuring                -         148           9        148

    Charge/(credit) for
     BlueLight.com               (6)          5          (6)        97

    Charge for employee severance
     and VERP                     -           -           -         23

  Total non-comparable items     (6)        153         821        268

  Tax benefit                     -         (56)          -        (83)

  Total non-comparable items,
   net of tax                    (6)         97         821        185

  Reorganization items, net       -           -         278          -

  Net loss before non-comparable
   items, reorganization items,
    net and discontinued
     operations               $(390)      $(152)    $(1,056)     $(611)

  Net loss per share adjusted for
   non-comparable items,
    reorganization items, net and
     discontinued operations  $(.78)     $(0.31)     $(2.10)    $(1.24)

  Net loss per share,
   as reported                $(.76)     $(0.50)     $(4.21)    $(1.62)

  Basic and diluted weighted
   average shares (millions)  502.5       497.8       502.7      492.4

  Third Quarter Analysis

The following analysis of third quarter results excludes non-comparable items, discontinued operations, and reorganization items:

Selling, General and Administrative expenses (SG&A) for the third quarter of 2002 decreased by $233 million from the year-ago quarter. SG&A as a percent of sales was 22.5 percent in the third quarter of 2002, compared with 21.8 percent in the third quarter of 2001. The decrease in SG&A from the previous year is due primarily to lower payroll and benefits resulting from the closure of 283 stores in the second quarter of 2002, a reduction in electronic media and direct mail advertising, the employee reductions at headquarters in the third quarter of 2002, and lower depreciation expense due to an impairment charge recorded in the fourth quarter of fiscal 2001 and lower current year capital spending.

Gross margin as a percentage of sales decreased to 17.0 percent for the 13 weeks ended October 30, 2002, from 20.2 percent in the third quarter of 2001. This decrease is primarily related to an increase in promotional markdowns designed to bring customers back into Kmart's stores, an increase in clearance markdowns to improve sell-through on seasonal apparel, and a decrease in vendor allowances. This decrease was partially offset by increased margin as a result of the reduction in the BlueLight Always program.

Nine Month Results

For the 39 weeks ended October 30, 2002, Kmart reported a net loss of $2.12 billion, or $4.21 per share, versus a net loss, as restated, of $796 million, or $1.62 per share, for the 39 weeks ended October 31, 2001. Excluding non-comparable items, discontinued operations and reorganization items, the Company's net loss was $1.06 billion, or $2.10 per share, in the first nine months of 2002, compared with a net loss of $611 million, or $1.24 per share, in the same period in 2001.

Net sales for the 39-week period ended October 30, 2002 were $21.89 billion, compared with $25.27 billion in 2001. On a same-store sales basis, sales declined 10.2 percent from the first nine months of 2001.

Restatement of Prior Periods

As discussed above (and as previously announced), as part of the review and preparation of its Form 10-Q for the 13 and 39 weeks ended October 30, 2002, the Company identified certain out-of-period adjustments. In addition, in its second quarter report on Form 10-Q, filed with the SEC on September 16, 2002, the Company had previously identified and described certain other out- of-period adjustments. Upon review of the aggregate impact of the new, as well as the previously disclosed and recorded adjustments, Kmart concluded that restating its financial statements for the prior periods was appropriate because the aggregate adjustment was material to its 2002 fiscal year results.

The tables below show the effects of the restatements on reported earnings for the prior periods presented. The restatement had the aggregate effect of decreasing the Company's net loss for the previously reported 26-week period ended July 31, 2002 by $92 million.

The aforementioned adjustments relate primarily to:

a) An understatement of historical accruals for certain leases with varying rent payments and a related understatement of historical rent expense.

b) A software programming error in Kmart's accounts payable system that resulted in some paid invoices awaiting a store report of delivery not being appropriately treated in the Company's financial statements. This error, restricted to a single vendor with unique billing arrangements, resulted in an understatement of "Cost of sales, buying and occupancy" since 1999.

c) Adjustments, as previously disclosed in Kmart's 2002 second quarter report on Form 10-Q, for certain costs formerly capitalized into inventory. Inventory included amounts added for internal purposes to analyze gross margin on a comparable basis across all business units and to optimize purchasing decisions. These amounts are commonly referred to in the retail industry as "inventory loads," and should have been eliminated for external reporting purposes to the extent the related inventory remained unsold at the end of the period.

d) The premature recording, as previously disclosed in Kmart's 2002 second quarter report on Form 10-Q, of vendor allowance transactions in fiscal year 2000 and prior fiscal years.

In addition, given the restatement for the items noted above, Kmart is also adjusting previously reported financial results for miscellaneous immaterial items that were identified and previously recorded in the ordinary course of business. These items are now being recorded in the appropriate fiscal periods.

The summary of the effects of the restatement on the results of operation for the 13- and 39-week periods ended October 31, 2001 are presented in the tables below.

                              13 Weeks Ended October 31, 2001
                                         Adjustments

  (Dollars in millions)      As          Lease        Accounts
                         previously     accrual        payable     Inventory
                          reported*    adjustments   adjustments     loads

  Sales                    $8,019         $ -           $ -           $ -
  Cost of sales, buying
   and occupancy           $6,434          $1           $14           $15
  Gross margin             $1,585         ($1)         ($14)         ($15)
  Selling, general and
   admin. expenses         $1,837         $ -           $ -            $4

  Operating (loss) income   ($246)        ($1)         ($14)         ($19)

  (Benefit from) provision
   for income taxes         ($118)        $ -           ($5)          ($7)
  Net (loss) income         ($235)        ($1)          ($9)         ($12)
  Basic/Diluted (loss)
   earnings per
   common share            ($0.47)      $0.00        ($0.01)       ($0.03)


  (Dollars in millions)
                            Vendor                      As
                          allowances     Other       restated

  Sales                       $ -         $ -        $8,019
  Cost of sales, buying
   and occupancy             ($20)        $19        $6,463
  Gross margin                $20        ($19)       $1,556
  Selling, general and
   admin. expenses            $ -        ($10)       $1,831

  Operating (loss) income     $20         ($9)        ($269)

  (Benefit from) provision
   for income taxes            $7         ($4)        ($127)
  Net (loss) income           $13         ($5)        ($249)
  Basic/Diluted (loss)
   earnings per
   common share             $0.02      $(0.01)       ($0.50)



                              39 Weeks Ended October 31, 2001
                                         Adjustments

  (Dollars in millions)      As          Lease        Accounts
                         previously     accrual        payable     Inventory
                          reported*    adjustments   adjustments     loads

  Sales                   $25,273         $ -           $ -           $ -
  Cost of sales, buying
   and occupancy          $20,521          $4           $30            $6
  Gross margin             $4,752         ($4)         ($30)          ($6)
  Selling, general and
   Admin. expenses         $5,553         $ -           $ -           ($6)

  Operating (loss) income   ($934)        ($4)         ($30)          $ -

  (Benefit from) provision
   for income taxes         ($390)        ($1)         ($11)          $ -
  Net (loss) income         ($845)        ($3)         ($19)          $ -
  Basic/Diluted (loss)
   earnings per
   common share            ($1.70)     ($0.01)       ($0.04)        $0.00


  (Dollars in millions)
                            Vendor                      As
                          allowances     Other       restated
  Sales                       $ -         $ -       $25,273
  Cost of sales, buying
   and occupancy             ($84)       ($26)      $20,451
  Gross margin                $84         $26        $4,822
  Selling, general and
   Admin. expenses            $ -         ($1)       $5,546

  Operating (loss) income     $84         $27         ($857)

  (Benefit from) provision
   for income taxes           $31          $9         ($362)
  Net (loss) income           $53         $18         ($796)
  Basic/Diluted (loss)
   earnings per
   common share             $0.10       $0.04        ($1.62)

* As previously reported in the quarterly report on Form 10-Q/A filed on June 12, 2002.

The net impact of the restatement on prior fiscal years was to reduce reported earnings by $28 million in fiscal 2001, $24 million in fiscal 2000, and $40 million in fiscal 1999. The restatement also had the effect of reducing the retained earnings on the Company's balance sheet at January 30, 1999 by $138 million. More detailed information concerning these adjustments can be found in the Company's Quarterly Report on Form 10-Q.

The Company is in the process of preparing an amended Annual Report on Form 10-K/A for the 2001 fiscal year and amended Quarterly Reports on Form 10- Q/A for the first two quarters of the 2002 fiscal year and will file such reports as soon as practicable.

Other Matters

In its Quarterly Report on Form 10-Q for the third quarter, filed with the SEC today, the Company notes that in light of returns in the equity markets, the Company presently expects that it will likely be required to commence making contributions to its defined benefit pension plan in 2005. Kmart's pension plan was frozen in January 1996. Given that the plan is frozen, the timing for the commencement of future funding requirements will depend, in large part, on the future investment performance of the plan's assets. Further information about this matter is available in the Form 10-Q report.

                            KMART CORPORATION
             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (Dollars in millions, except per share data)
                              (Unaudited)

                            13 Weeks Ended            39 Weeks Ended
                       October 30,   October 31,  October 30,  October 31,
                          2002          2001         2002         2001

  Sales                  $6,729        $8,019      $21,887      $25,273
  Cost of sales,
   buying and occupancy   5,586         6,463       18,811       20,451
  Gross margin            1,143         1,556        3,076        4,822
  Selling, general and
   administrative
   expenses               1,511         1,831        4,888        5,546
  Equity income (loss)
   in unconsolidated
   subsidiaries               8            11           27          (13)
  Restructuring,
   impairments and
   other charges             (6)            5            9          120
  Loss before interest,
   income taxes,
   reorganization items
   and dividends on
   convertible preferred
   securities
   of subsidiary trust     (354)         (269)      (1,794)        (857)
  Interest expense, net
   (contractual interest
   for 13 and 39
   weeks ended October 30,
   2002 was $104 and $306,
   respectively)             37            96          102          267
  Reorganization items, net   -             -          278            -
  Income tax benefit         (7)         (127)         (19)        (362)
  Dividends on convertible
   preferred securities of
   subsidiary trust, net of
   income taxes of $0, $6,
   $0 and $18 respectively
   (contractual dividend for
   13 and 39 weeks ended
   October 30, 2002 was
   $17 and $52 net of tax,
   respectively               -            11            -           34
  Net loss from
   continuing operations   (384)         (249)      (2,155)        (796)
  Net gain from
   discontinued operations    1             -           37            -
  Net loss                $(383)        $(249)     $(2,118)       $(796)


  Basic/Diluted loss
   per common share
   from continuing
   operations            $(0.76)       $(0.50)      $(4.28)      $(1.62)
  Basic/Diluted loss
   per common share
   from discontinued
   operations                 -             -         0.07            -
  Basic/Diluted loss
   per common share      $(0.76)       $(0.50)      $(4.21)      $(1.62)

  Basic/Diluted
   weighted average
   shares (millions)      502.5         497.8        502.7        492.4


                            KMART CORPORATION
                  CONDENSED CONSOLIDATED BALANCE SHEETS

                 (Dollars in millions, except share data)

                                            (Unaudited)
                            October 30, 2002           October 31, 2001

  ASSETS
  Current Assets:
  Cash and cash equivalents             $381                       $366
  Merchandise inventories              6,330                      8,256
  Other current assets                   687                        763
  Total current assets                 7,398                      9,385

  Property and equipment, net          5,764                      6,921
  Other assets and deferred charges      230                        562
  TOTAL ASSETS                       $13,392                    $16,868

  LIABILITIES AND EQUITY
  Current Liabilities:
  Long-term debt due within one year      $-                       $478
  Accounts payable                     1,825                      3,758
  Accrued payroll and other
   liabilities                           691                      1,163
  Taxes other than income taxes          306                        271
  Total current liabilities            2,822                      5,670


  Long-term debt and notes payable       575                      3,310
  Capital lease obligations              660                        881
  Other long-term liabilities            209                        916
  Total liabilities not subject
   to compromise                       4,266                     10,777

  Liabilities subject to compromise    7,128                          -

  Company obligated mandatorily redeemable
   convertible Preferred securities of a
   subsidiary trust holding solely 7 3/4%
   convertible junior subordinated
   debentures of Kmart (redemption value
   $883, $898 and $898, respectively)    874                        890
  Common stock, $1 par value,
   1,500,000,000 shares authorized:
   503,458,279, 498,416,655 and 503,294,515
   shares outstanding, respectively      503                        498
  Capital in excess of par value       1,709                      1,682
  (Accumulated deficit)/Retained
    earnings                          (1,088)                     3,021
  TOTAL LIABILITIES AND EQUITY       $13,392                    $16,868



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

                              39 Weeks Ended            39 Weeks Ended
                             October 30, 2002          October 31, 2001

  CASH FLOW FROM OPERATING ACTIVITIES
    Net loss                          $(2,118)                   $(796)
    Adjustments to reconcile net loss
    to net cash provided by (used for)
    operating activities:
      Gain from discontinued operations   (37)                       -
      Restructuring, impairments and
       other charges                      821                      268
      Reorganization items, net           278                        -
      Depreciation and amortization       558                      618
      Equity (income) loss in unconsolidated
       subsidiaries                       (27)                      13
      Dividends received from Meldisco     45                       51
      Changes in Operating Assets
       and Liabilities:
         Increase in inventories       (1,202)                  (1,899)
         Increase in accounts payable     859                    1,591
         Deferred income taxes and taxes
          payable                         (23)                    (348)
         Other assets                      58                       64
         Other liabilities                260                      153
         Cash used for store closings
          and other charges              (147)                    (157)
  Net cash provided by (used for)
   operating activities                  (675)                    (442)

  Net cash used for reorganization items (113)                       -

  CASH FLOW FROM INVESTING ACTIVITIES
    Capital expenditures                 (206)                  (1,084)
    Investment in BlueLight.com             -                      (45)
  Net cash used for investing activities (206)                  (1,129)

  CASH FLOW FROM FINANCING ACTIVITIES
    Proceeds from issuance of debt          -                    1,887
    Proceeds from DIP Credit Facility     245                        -
    Debt issuance costs                   (36)                       -
    Issuance of common shares               -                       40
    Payments on debt                      (22)                    (275)
    Payments on capital lease obligations (57)                     (62)
    Payments of dividends on preferred
     securities of subsidiary trust         -                      (54)
  Net cash (used for) provided by
   financing activities                   130                    1,536

  Net change in cash and cash
   equivalents                           (864)                     (35)
  Cash and cash equivalents,
   beginning of year                    1,245                      401

  Cash and cash equivalents,
   end of period                         $381                     $366


Kmart Corporation is a mass merchandising company that serves America with more than 1,800 Kmart and Kmart SuperCenter retail outlets. Kmart in 2001 had sales of $36 billion. The Company's common stock is currently quoted on the Pink Sheets Electronic Quotation Service (www.pinksheets.com ) under the symbol KMRTQ.

Cautionary Statement Regarding Forward-Looking Information

Statements made by Kmart which address activities, events or developments that we expect or anticipate may occur in the future are forward-looking statements. Such forward-looking statements are and will be, as the case may be, subject to many risks and uncertainties, including, but not limited to, Kmart's having filed for bankruptcy and factors relating to Kmart's operations and the business environment in which Kmart operates, which may cause the actual results of Kmart to be materially different from any future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include those set forth in Kmart's Annual Report on Form 10-K for the fiscal year ended January 30, 2002, Kmart's Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 2002, or in other filings made, from time to time, by Kmart with the Securities and Exchange Commission (the "Company Filings"). The forward-looking statements speak only as of the date when made and Kmart does not undertake to update such statements.

Similarly, these and other factors, including the terms of any reorganization plan ultimately confirmed, can affect the value of our various pre-petition liabilities, common stock and/or other equity securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies.

A plan of reorganization could result in holders of Kmart common stock receiving no distribution on account of their interest and cancellation of their interests. As described in the Company's Quarterly Report on Form 10-Q, holders of Kmart common stock should assume that they could receive little or no value as part of a plan of reorganization. In addition, under certain conditions specified in the Bankruptcy Code, a plan of reorganization may be confirmed notwithstanding its rejection by an impaired class of creditors or equity holders and notwithstanding the fact that equity holders do not receive or retain property on account of their equity interests under the plan. In light of the foregoing, the Company considers the value of the common stock to be highly speculative and cautions equity holders that the stock may ultimately be determined to have no value.

Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in Kmart common stock or any claims relating to pre-petition liabilities and/or other Kmart securities.

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SOURCE: Kmart Corporation

CONTACT: Kmart Media Relations, +1-248-463-1021

Web site: http://www.kmart.com/








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