Kmart Holding Corporation Reports Profit for Fourth Quarter of Fiscal 2003

Company profitable since reorganization; Adds to strong liquidity position

Kmart Holding Corporation (NASDAQ: KMRT) today reported net income of $276 million for the fourth quarter of fiscal 2003. The company also announced that it was profitable for the 39-week period ended January 28, 2004.(1)

Fiscal Fourth Quarter Results

For the 13 weeks ended January 28, 2004, Kmart Holding Corporation (Kmart or the Successor Company) reported net income of $276 million, or $2.78 per diluted share. Kmart Corporation (the Predecessor Company) reported a net loss of $1.1 billion for the same period in the prior year.(1)

Income before interest expense, reorganization items, income taxes and discontinued operations for the 13 weeks ended January 28, 2004 was $503 million, which includes gains on real estate transactions of $86 million. Same-store sales and total sales for the period declined 13.5% and 25.8%, respectively.

Julian C. Day, President and Chief Executive Officer of Kmart, said: "The men and women of the new Kmart are focused on managing our business to restore profitability. By giving careful thought to the processes of sourcing, logistics, pricing, inventory management and in-store presentation, we have significantly improved the profitability of our market basket. Our store associates and store managers are committed to continuous improvement of customer service. Likewise, our employees based at headquarters are dedicated to supporting improvements in the store experience. Offering our customers superior products supported with value, convenience and service in a way that allows Kmart to generate profitable sales, will support the continued investment in our business to better serve customers in the future."

Day added, "Kmart's inventory investment has been prudently managed throughout the year, ending the fiscal year at a level below $3.3 billion, a reduction of over 25% relative to the prior year on a comparable store basis. Our improved inventory management, along with cash flow from operations and receipts from sales of surplus real estate, has significantly strengthened our cash position."

As of January 28, 2004, Kmart had approximately $2.1 billion in cash and cash equivalents, which exceeded expectations, due to a profitable month of January and incremental inventory reduction. Additionally, the Company had borrowing availability of approximately $1.1 billion on its $1.5 billion credit facility, net of outstanding letters of credit. Kmart has not borrowed under its credit facility other than for letters of credit.

39-Week Results(1)

In accordance with generally accepted accounting principles, the reported historical financial statements of the Predecessor Company for periods prior to May 1, 2003 cannot be added to those of Kmart. As such, this press release references the 39-week Successor Company period, instead of a 52-week fiscal year.

For the 39 weeks ended January 28, 2004, Kmart reported net income of $248 million, or $2.52 per diluted share. The Predecessor Company reported a net loss of $1.8 billion for the 39 weeks ended January 29, 2003.

Same-store sales and total sales decreased 9.5% and 23%, respectively, for the 39 weeks ended January 28, 2004, compared to the 39 weeks ended January 29, 2003. The decrease in same-store sales is due primarily to several Company-wide promotional events occurring in the prior year, along with a reduction in advertising, including the frequency of mid-week 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 2003.

Gross margin increased $140 million to $4.0 billion, for the 39 weeks ended January 28, 2004, from $3.8 billion for the comparable period a year ago. Gross margin, as a percentage of sales, increased to 23.4% for the 39 weeks ended January 28, 2004, from 17.4% for the comparable period a year ago. Impacting the gross margin rate in the prior period are inventory markdowns of $498 million, primarily related to our fiscal 2003 store closings. The markdowns were charged to Cost of sales, buying and occupancy in the fourth quarter of fiscal 2002 when the decision to close the stores was made. Also impacting gross margin is a decrease in distribution costs, lower depreciation expense resulting from impairment charges taken last year and the write-off of long-lived assets in conjunction with the application of Fresh-Start accounting, lower inventory shrinkage, supplier cost reductions and an improved sales mix as a result of a decrease in promotional activity, as referenced in the sales summary above. Gross margin also benefited from the reclassification of co-op advertising recoveries recorded in cost of sales, buying and occupancy in 2003. These improvements in the gross margin rate were partially offset by greater clearance markdowns.

SG&A (Selling, General & Administrative expenses), which includes advertising costs (net of co-op recoveries of $199 million in 2002) decreased $995 million for the 39 weeks ended January 28, 2004, to $3.6 billion, or 21.0% of sales, from $4.6 billion, or 20.6% of sales, for the 39 weeks ended January 29, 2003. The decrease in SG&A is primarily due to the reduction of our store base after closing 316 stores during the first quarter of 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 advertising recoveries, as discussed above.

  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, reorganization costs, fresh start valuation charges, restructuring, impairment and other charges and other bankruptcy- related 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.

Year-to-date Adjusted EBITDA was $605 million as compared to the previously disclosed annual incentive compensation target of $375 million. Disclosure of Year-to-date Adjusted EBITDA is being made solely 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. Set forth below is a reconciliation of the Consolidated Statements of Operations to Year-to-date Adjusted EBITDA:

                                     Successor     Predecessor
                                      Company       Company
                                      39-Weeks      13-Weeks
                                       Ended         Ended
                                     January 28,    April 30,     Combined
                                        2004          2003

  Net income (loss)                     $248         $(862)        $(614)

  Adjustments to reconcile to
   Year-to-date Adjusted EBITDA:
     Income tax provision (benefit)      152            (6)          146
     Interest expense, net               105            57           162
     Depreciation and amortization         6           140           146
     Reorganization items                  -           769           769
     Other items excluded from
      Year-to-date Adjusted EBITDA       (48)           44           (4)
  Year-to-date Adjusted EBITDA          $463          $142          $605



                  CONSOLIDATED STATEMENTS OF OPERATIONS
               (Dollars in Millions, except per share data)


                            Fiscal 4th Quarter          39-Week Period
                          Successor   Predecessor   Successor   Predecessor
                           Company     Company       Company      Company
                          January 28,  January 29,  January 28,  January 29,
                             2004         2003         2004         2003

   Sales                   $6,328       $8,529      $17,072      $22,171
   Cost of sales, buying
    and occupancy           4,740        7,058       13,084       18,323
   Gross margin             1,588        1,471        3,988        3,848

   Selling, general and
    administrative
    expenses                1,173        1,588        3,577        4,572
   Restructuring, impairment
    and other charges           -          566            -          574
   Net (gains) losses on
    sales of assets           (86)           6          (89)           5
   Equity income in
    unconsolidated
    subsidiaries               (2)          (7)          (5)         (29)
   Income (loss)
    before interest expense,
    reorganization items,
    income taxes and
    discontinued
    operations                503         (682)         505       (1,274)
   Interest expense, net       60           53          105          122
   Reorganization items,
    net                         -          104            -          112

   Income (loss) before
    income taxes and
    discontinued
    operations                443         (839)         400       (1,508)
   Provision for (benefit
    from) income taxes        167           (5)         152          (12)

   Income (loss) before
    discontinued
    operations                276         (834)         248       (1,496)
   Discontinued operations
    (net of income taxes
    of $0)                      -         (267)           -         (281)

   Net income (loss)         $276      $(1,101)        $248      $(1,777)

   Basic income (loss) per
    common share before
    discontinued
    operations              $3.08       $(1.61)       $2.77       $(2.95)
   Discontinued operations      -        (0.52)           -        (0.55)
   Basic net income (loss)
    per common share        $3.08       $(2.13)       $2.77       $(3.50)

   Diluted income (loss)
    per common share
    before discontinued
    operations              $2.78       $(1.61)       $2.52       $(2.95)
   Discontinued operations      -        (0.52)           -        (0.55)
   Diluted net income
    (loss) per common
    share                   $2.78       $(2.13)       $2.52       $(3.50)

   Basic weighted average
    shares (millions)        89.5        516.9         89.6        507.4

   Diluted weighted average
    shares (millions)        99.6        516.9         99.3        507.4


                       CONSOLIDATED BALANCE SHEETS
                 (Dollars in millions, except share data)


                                          Successor Company     Predecessor
                                                                  Company
                                        January 28,  April 30,   January 29,
                                           2004        2003         2003
     ASSETS
     Current Assets
       Cash and cash equivalents         $2,088      $1,232         $613
       Merchandise inventories            3,238       4,431        4,825
       Accounts receivable                  301         382          473
       Other current assets                 184         509          191

     Total current assets                 5,811       6,554        6,102

     Property and equipment, net            153          10        4,892
     Other assets and deferred charges      120          96          244

     Total Assets                        $6,084      $6,660      $11,238

     LIABILITIES AND SHAREHOLDERS'
      EQUITY (DEFICIT)
     Current Liabilities
       Mortgages payable due within
        one year                             $4          $8           $-
       Accounts payable                     820       1,160        1,248
       Accrued payroll and other
        liabilities                         671       1,321          710
       Taxes other than income taxes        281         274          162

     Total current liabilities            1,776       2,763        2,120

     Long-term Liabilities
       Long-term debt and mortgages
        payable                             103         108            -
       Capital lease obligations            374         415          623
       Pension obligation                   873         854            -
       Unfavorable operating leases         342         344            -
       Other long-term liabilities          424         463          181

     Total long-term liabilities          2,116       2,184          804

     Total liabilities not subject to
      compromise                          3,892       4,947        2,924

     Liabilities subject to compromise        -           -        7,969

     Predecessor Company obligated
      mandatorily redeemable convertible
      preferred securities                    -           -          646

     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
        shares issued and
        outstanding                           -           -          519
       Successor Company common stock
        $0.01 par value, 500,000,000
        shares authorized; 89,633,760 and
        89,677,509 shares issued,
        respectively                          1           1            -
       Treasury stock, at cost               (1)          -            -
       Capital in excess of par value     1,943       1,712        1,922
       Retained earnings (Accumulated
        deficit)                            248           -       (1,835)
       Accumulated other comprehensive
        income (loss)                         1           -         (907)
     Total shareholders' equity
      (deficit)                           2,192       1,713         (301)

     Total Liabilities and
      Shareholders' Equity (Deficit)     $6,084      $6,660      $11,238


                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (Dollars in millions)


                                        Successor
                                         Company      Predecessor Company
                                        39-Weeks     13-Weeks     52-Weeks
                                          Ended       Ended        Ended
                                        January 28,  April 30,   January 29,
                                           2004        2003         2003

   Cash Flows From Operating Activities
         Net income (loss)                 $248       $(862)     $(3,219)
         Adjustments to reconcile net
          income (loss) to net cash
          provided by operating
          activities:
               Restructuring, impairments
                and other charges             -          44        2,036
               Reorganization items, net      -         769          363
               Depreciation and
                amortization                 31         177          737
               Net (gains) losses
                on sales of assets          (89)          -            5
               Equity income in
                unconsolidated
                subsidiaries                 (5)         (7)         (34)
         Dividends received from Meldisco     -          36           45
         Cash used for store closings
          and other charges                 (15)        (64)        (134)
         Cash used for payments of exit
          costs and other
          reorganization items             (481)        (19)        (135)
         Change in:
               Merchandise inventories    1,193         480         (168)
               Accounts payable            (340)       (117)         401
               Deferred income taxes
                and taxes payable           (60)        (16)          23
               Other assets                 110         123          101
               Other liabilities            144          32           67
   Net cash provided by operating
    activities                              736         576           88

   Cash Flows From Investing Activities
         Proceeds from sale of
          property and equipment            182          64           29
         Capital expenditures              (108)         (4)        (252)
   Net cash provided by (used for)
    investing activities                     74          60         (223)

   Cash Flows From Financing Activities
         Payments on debt                   (37)         (1)         (31)
         Purchase of treasury stock          (4)          -            -
         Debt issuance costs                (48)          -          (42)
         Payments on capital lease
          obligations                       (75)        (16)         (94)
         Fees paid to Plan Investors        (13)          -            -
         Proceeds from issuance of debt      83           -            -
         Issuance of common shares          140           -            -
         Net payments on DIP Credit
          Facility                            -           -         (330)
   Net cash provided by (used for)
    financing activities                     46         (17)        (497)

   Net change in cash and cash
    equivalents                             856         619         (632)
   Cash and cash equivalents, beginning
    of period                             1,232         613        1,245
   Cash and cash equivalents, end of
    period                               $2,088      $1,232         $613



  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 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 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, 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 largest employers in the country with approximately 158,000 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; 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; and 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, or Kmart Investor
Relations, +1-248-463-1040

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








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