Kmart hits paydirt — first profit since chill

TROY, MICH. — Building margins at a heady pace, and at the same time holding the line on costs and shredding its stockpiles, Kmart recorded its first profit since emerging from bankruptcy, with $276 million in earnings, reversing a year-before loss of $1.1 billion when the company struggled with piles of bankruptcy and restructuring costs.

The retailer, once written off as all but dead, closed out the quarter with about $2.1 billion in cash on hand, ahead of expectations, due to a strong January and incremental inventory reductions. Giving it even more flexibility, Kmart had about $1.1 billion still available on its $1.5 billion financing pact. Other than for letters of credit used to finance imports, the retailer said it has not borrowed against its credit pact.

Most of the earnings rebound stemmed from a strong resurgence in margins which offset a 25.8 percent slide in sales, to $6.3 billion from $8.5 billion last year, after the company shut down 316 stores during the first quarter. Even without the impact of the shuttered stores, same-store sales tumbled a worrisome 13.5 percent.

In a big prop to the bottom line, average gross margin improved by almost half during the closing quarter, rising by 790 basis points, or 7.9 percentage points, to 25.1 percent from 17.2 percent a year ago. Punishing the gross margin rate a year ago were inventory markdowns tied to store closings. Even after the 25.8 percent slide in sales, the retailer managed to grow gross margin dollars by 8 percent, to $1.6 billion from $1.5 billion. Further strengthening margins were lower distribution costs, a lower shrinkage rate, supplier cost reductions and an improved sales mix stemming from a lower level of promotional activity.

At the same time, costs held relatively steady, backing off slightly, by 10 basis points, or one-tenth of a percentage point, to 18.5 percent from 18.6 percent.

Lending even more strength to the bottom line, Kmart shaved its stockpiles by almost a third from year-ago levels.

Inventories were cut by 32.9 percent, compared with the 25.8 percent reduction in sales, to $3.2 billion from $4.8 billion in the year-before closing quarter, yielding a cash savings of $1.6 billion.

Julian Day, president and CEO, said, "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 percent relative to the prior year on a comparable store basis. Our improved inventory management, along with cash flow operations and receipts from sales of surplus real estate, has significantly strengthened our cash position."

And in notably good news for home fashions suppliers, the retailer reported that sales of Martha Stewart Everyday products have been running at historic levels.