Kmart Corporation Reports Second Quarter 2002 Results

Kmart Corporation (NYSE: KM) announced today the financial results for its second quarter of fiscal 2002 and the filing of its Quarterly Report on Form 10-Q and monthly operating reports for July and August 2002.

For the 13 weeks ended July 31, 2002, Kmart reported a net loss of $377 million, or $0.75 per share, versus a net loss of $377 million, or $0.77 per share, for the 13 weeks ended August 1, 2001. Excluding non-comparable items, discontinued operations and reorganization items, the Company's net loss was $333 million, or $0.66 per share, in the second quarter of 2002 compared with a net loss of $304 million, or $0.62 per share, in the second quarter of 2001. Net sales for the 13-week period ended July 31, 2002 were $7.52 billion, a decrease of 15.7 percent from $8.92 billion in 2001. As previously reported, Kmart closed 283 underperforming stores in the second quarter. On a same- store basis, sales declined 11.0 percent from the second quarter of 2001.

In its monthly operating report for the period from August 1 to August 28, 2002, Kmart reported a net loss of $126 million on net sales of $2.09 billion. Comparable store sales declined 11.9 percent from the same period a year ago. Kmart also reported that as of August 28, 2002, the Company's balance sheet cash position was approximately $830 million, of which approximately $500 million represents cash at stores and outstanding checks. In addition, Kmart confirmed it had availability under its debtor-in-possession (DIP) facility of $1.45 billion at the end of August.

James B. Adamson, Chairman and Chief Executive Officer of Kmart, said, "We continued to focus in the second quarter of 2002 on stabilizing the business and addressing the operational challenges that have hampered Kmart's financial performance. However, despite the success of initiatives such as our Customer Appreciation promotion in early June, the Company's sales have improved slower than we would have liked."

Adamson continued, "At the same time, I want to again emphasize the focused commitment of this management team to work with our employees, vendors, lenders, and other stakeholders to complete our financial and operational restructuring and emerge from Chapter 11 as soon as possible. We are pursuing opportunities to increase store traffic and sales. Recent initiatives include the successful introduction of the JOE BOXER® line of fashion and home furnishings for the back-to-school season and the development of new marketing efforts and exclusive brands designed to appeal to Hispanic customers. We have also moved aggressively to ensure that our cost structure is properly aligned with our revenue base. In August, we announced cost reduction initiatives that are expected to achieve savings of $66 million this year and $130 million in future years."

The Company's operating results for the second quarter 2002 include charges totaling $90 million for accounting adjustments relating primarily to prior periods. These adjustments include a charge of $57 million to write-off certain costs, commonly referred to as inventory "loads," which had been capitalized into inventory. These costs, which had been recorded for internal reporting purposes, should have been eliminated in the Company's external financial reports.

The Company's Form 10-Q report for the second quarter, filed with the SEC today, reviews certain matters that have been investigated since the filing of its 2001 10-K earlier this year. In particular, the report discusses the premature recording of certain vendor allowances, which had the effect of increasing the reported loss in fiscal year 2001 and reducing the reported loss in fiscal year 2000. No restatement of prior period financial statements was required due to the immaterial effect of such items, particularly in light of Kmart's filing of a voluntary petition for reorganization under Chapter 11. The 10-Q report also discusses the results of an internal inventory quality review.

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 and 26 weeks ended July 31, 2002 and August 1, 2001, respectively:

                                (Unaudited)                 (Unaudited)
  (Dollars in millions,     13 Weeks     13 Weeks       26 Weeks   26 Weeks
   except per share data)    Ended        Ended          Ended       Ended
                            July 31,     August 1,      July 31,   August 1,
                              2002         2001           2002       2001

  Net loss, as reported      $(377)       $(377)       $(1,826)     $(610)

  Gain from discontinued
   operations                   20            -             20          -

  Net loss from continuing
   operations                 (397)        (377)        (1,846)      (610)

  Non-comparable items:
   2002 cost reduction
    initiative                  15            -             15          -
   2002 inventory markdowns     27            -            785          -
   Accelerated depreciation
    on equipment                 9            -             27          -
   Charge for BlueLight.com      -           92              -         92
   Charge for employee
    severance and VERP           -            -              -         23

  Total non-comparable items    51           92            827        115
  Tax benefit                    -          (19)             -        (27)
  Total non-comparable items,
   net of tax                   51           73            827         88

  Reorganization items, net     13            -            278          -

  Net loss before non-
   comparable items,
   reorganization items, net
   and discontinued
   operations                $(333)       $(304)         $(741)     $(522)

  Net loss per share
   adjusted for non-
   comparable items,
   reorganization items,
   net and discontinued
   operations               $(0.66)      $(0.62)        $(1.47)    $(1.07)

  Net loss per share,
   as reported              $(0.75)      $(0.77)        $(3.63)    $(1.25)

  Basic and diluted
   weighted average
   shares (millions)         502.7        490.6          502.8      489.6


Non-comparable items in the second quarter of 2002 include a charge of $15 million related to the cost reduction initiative announced on August 19, 2002; a charge of $27 million related to the write-down of inventory liquidated at the 283 closing stores to net realizable value; and a charge of $9 million primarily related to the accelerated depreciation of supply chain software. Reorganization charges in the second quarter totaled $13 million, including charges of $29 million for professional fees and $37 million for the Key Employee Retention Plan and retention bonuses for associates in the 283 closing stores, partially offset by a gain of $28 million related to the adjustment of estimated allowable lease obligation claims; a gain of $20 million related to the settlement of certain pre-petition obligations (primarily terminated leases); and $5 million of other reorganization income.

The following analysis excludes non-comparable items, discontinued operations, and reorganization items:

Selling, General and Administrative expenses (SG&A) for the second quarter of 2002 decreased by $362 million from the year-ago quarter. SG&A, as a percent of sales, was 21.8 percent in the second quarter of 2002 compared with 22.5 percent in the second quarter of 2001. This decrease is due primarily to decreases in expenses for general liability claims, decreases in payroll, benefits and utilities expense arising from the closure of 283 stores in the second quarter of 2002, lower employee bonus accruals, and lower depreciation expense.

Gross margin as a percentage of sales decreased to 17.6 percent for the 13 weeks ended July 31, 2002, from 18.7 percent in the second quarter of 2001. This decrease is primarily attributable to an increase in clearance markdowns, shrinkage and store rent, partially offset by a decrease in sales of food and consumables, which carry lower margin rates, increased markon on regular sales as a result of the reduction in the BlueLight Always program and a decrease in promotional markdowns.

Six month results

For the 26 weeks ended July 31, 2002, Kmart reported a net loss of $1.826 billion, or $3.63 per share, versus a net loss of $610 million, or $1.25 per share, for the 26 weeks ended August 1, 2001. Excluding non-comparable items, discontinued operations and reorganization items, the Company's net loss was $741 million, or $1.47 per share, in the first half of 2002 compared with a net loss of $522 million, or $1.07 per share, in the same period in 2001.

Net sales for the 26-week period ended July 31, 2002 were $15.16 billion, a decrease of 12.1 percent from $17.25 billion in 2001. On a same-store basis, sales declined 11.4 percent from the first half of 2001.

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.

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 or in other filings made, from time to time, by Kmart with the Securities and Exchange Commission. 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 value for their interests. Because of such possibilities, the value of the common stock is highly speculative. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.

                            KMART CORPORATION
             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

               (Dollars in millions, except per share data)

                              (Unaudited)                  (Unaudited)
                         13 Weeks     13 Weeks         26 Weeks    26 Weeks
                           Ended       Ended            Ended       Ended
                         July 31,     August 1,        July 31,    August 1,
                           2002         2001             2002        2001

  Sales                   $7,519       $8,917          $15,158     $17,254
  Cost of sales, buying
   and occupancy           6,226        7,253           13,242      14,087
  Gross margin             1,293        1,664            1,916       3,167
  Selling, general and
   administrative
   expenses                1,644        2,004            3,435       3,716
  Equity income (loss)
   in unconsolidated
   subsidiaries               14           (8)              19         (24)
  Charges for BlueLight.com
   and other                  15           92               15         115
  Loss before interest,
   income taxes and
   dividends on convertible
   preferred securities of
   subsidiary trust         (352)        (440)          (1,515)       (688)
  Interest expense, net       32           88               65         171
  Income tax benefit           -         (163)             (12)       (272)
  Reorganization items, net   13            -              278           -
  Dividends on convertible
   preferred securities of
   subsidiary trust, net of
   income taxes                -           12                -          23
  Net loss from continuing
   operations               (397)        (377)          (1,846)       (610)
  Gain from discontinued
   operations                 20            -               20           -
  Net loss                 $(377)       $(377)         $(1,826)      $(610)

  Basic/Diluted loss
   per common share       $(0.75)      $(0.77)          $(3.63)     $(1.25)

  Basic and diluted
   weighted average
   shares (millions)       502.7        490.6            502.8       489.6


                            KMART CORPORATION
                  CONDENSED CONSOLIDATED BALANCE SHEETS

                          (Dollars in millions)

                                                    (Unaudited)
                                           July 31, 2002     August 1, 2001
  ASSETS
  Current Assets:
  Cash and cash equivalents                   $1,003               $420
  Merchandise inventories                      5,281              6,869
  Other current assets                           650                746
  Total current assets                         6,934              8,035

  Property and equipment, net                  5,872              6,836
  Other assets and deferred charges              251                447
  TOTAL ASSETS                               $13,057            $15,318

  LIABILITIES AND EQUITY
  Current Liabilities:
  Long-term debt due within one year              $-               $116
  Accounts payable                             1,466              2,458
  Accrued payroll and other liabilities          641              1,219
  Taxes other than income taxes                  244                261
  Total current liabilities                    2,351              4,054

  Liabilities subject to compromise            7,376                  -

  Long-term debt and notes payable                 -              2,980
  Capital lease obligations                      682                902
  Other long-term liabilities                    127                920
  Convertible preferred securities               889                887
  Common stock                                   503                497
  Capital in excess of par value               1,694              1,670
  (Accumulated deficit)/Retained earnings       (565)             3,408
  TOTAL LIABILITIES AND EQUITY               $13,057            $15,318


                            KMART CORPORATION
             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                          (Dollars in millions)

                                (Unaudited)
                                                 26 Weeks         26 Weeks
                                                  Ended            Ended
                                                 July 31,         August 1,
                                                   2002             2001
  CASH FLOW FROM OPERATING ACTIVITIES
   Net loss                                     $(1,826)           $(610)
   Adjustments to reconcile net loss to
    net cash provided by (used for) operating
    activities:
    Gain from discontinued operations               (20)               -
    Restructuring, impairments and other
     charges                                        827              115
    Reorganization items, net                       278                -
    Depreciation and amortization                   375              413
    Equity (income) loss in unconsolidated
     subsidiaries                                   (19)              24
    Dividends received from Meldisco                 45               51
   Changes in Operating Assets and Liabilities:
    Increase in inventories                        (127)            (452)
    Increase in accounts payable                    716              292
    Deferred income taxes and taxes payable         (10)            (225)
    Other assets                                    104              158
    Other liabilities                               107              185
   Cash used for store closings and other
    charges                                        (131)            (105)
  Net cash provided by (used for) operating
   activities                                       319             (154)

  Net cash used for reorganization items            (50)               -

  CASH FLOW FROM INVESTING ACTIVITIES
   Capital expenditures                            (126)            (651)
   Investment in BlueLight.com                        -              (45)
  Net cash used for investing activities           (126)            (696)

  CASH FLOW FROM FINANCING ACTIVITIES
   Proceeds from issuance of debt                     -            1,194
   Debt issuance costs                                -               (3)
   Issuance of common shares                          -               28
   Payments on debt                                (349)            (273)
   Payments on capital lease obligations            (36)             (41)
   Payments of dividends on preferred
    securities of subsidiary trust                    -              (36)
   Net cash (used for) provided by financing
    activities                                     (385)             869

  Net change in cash and cash equivalents          (242)              19
  Cash and cash equivalents, beginning of year    1,245              401

  Cash and cash equivalents, end of period       $1,003             $420

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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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