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August 16, 2004 Contacts:
For Immediate Release
TROY, MICHIGAN, August 16, 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. 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. 
(Dollars in millions, except share data) (Unaudited) 
(Dollars in millions) (Unaudited) 
About Kmart Holding Corporation
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