• Andrea Lillo

Kmart's stock not 'holding' its own

The new year began with a rough start for Kmart, whose stock fluctuated greatly last week after Prudential Securities lowered its rating to "sell" from "hold." As if that weren't enough of a blow, Prudential's analyst also speculated that the retail giant could be headed for Chapter 11 if sales fail to improve over the next six months.

It was just the sort of impression Kmart execs have been working hard to refute.

Reinforcing that point, UBS Warburg retail analyst Linda Kristiansen, despite lowering her 12-month target price for the stock, said she is not concerned about the retailer's liquidity and views the possibility of the retailer filing for Chapter 11 as "highly unlikely."

She lowered her 12-month price target for the retailer to $5 a share from $11 a share, based on below-plan December same-store sales results.

Kmart in recent months has been attempting to turn analysts' attention toward the areas where its year-long campaign to overhaul operations has borne fruit: in-stocks up to 86 percent through the end of the third quarter; DC processing time up 10 percent; DC inventory levels down 20 percent; auto replenishment up from 40 percent of store inventory to 60 percent; 99 percent of DC orders now shipped with 100 percent accuracy.

But comparisons to rivals Wal-Mart Stores and Target continue to bedevil the nation's second largest discounter.

Prudential's rating decision, therefore, was not completely unsurprising. What roiled the market was the firm's bankruptcy salvo — even though analyst Wayne Hood made a point of noting that he did not consider bankruptcy imminent.

The news sent Kmart's stock tumbling on the day of the announcement, Jan. 2. Shares fell as much as 98 cents, to $4.48 before ending the day at $4.74, a 13.2 percent slide and a new 52-week low. It was the second most active issue on the New York Stock Exchange during the regular session, with more than 23.7 million shares changing hands. The average number of Kmart shares trading on any day is 4.5 million.

Shares were still slipping on Jan. 4, to a price of $4.00, just two hours prior to the close of business for the day.

Hood downgraded the discounter with concerns that reduced earnings per share could cause additional cash flow pressure and might result in capital spending cuts.

"In our opinion, the next six months represent a critical time for Kmart, and we would not be surprised if the company were to file Ch. 11 bankruptcy if trends do not improve," said Hood in a research paper.

Prudential lowered the rating to "hold" from "buy" in August, with concerns that cash flow would become increasingly tight. It had hoped trends would improve in the fourth quarter and that it would return Kmart to a "buy" rating. However, Prudential said, fourth quarter sales and earnings were disappointing and its cash flow concerns heightened.

Kmart's below-plan sales in December led Prudential to cut its EPS estimates for the fourth quarter to $0.20 from $0.43, and it is now looking for a loss of $0.12 in 2001 compared with its previous estimate of $0.15 in earnings per share. Prudential also reduced its 2002 estimate to $0.25 from $0.35.

These EPS reductions will place additional pressure on cash flow for 2001 and 2002, Hood said, and the cash flow and earnings shortfalls jeopardize Kmart's ability to fund its supercenter conversions.

Kmart did not return phone calls.

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