Kmart gathers steam after Ch. 11

TROY, MICH. — Fueled by stronger margins, deep cuts in costs and stringent inventory controls, Kmart recorded a first-quarter profit of $93 million, marking the retailer's second straight profitable quarter since emerging from bankruptcy.

Reflecting the earlier shutdown of 316 unprofitable stores, sales declined 25.3 percent, to $4.6 billion from $6.2 billion last year. Same-store sales continued to trend downward, falling 12.9 percent. Much of the drop in same-store sales was due, the retailer said, to the absence of several country-wide promotional events that took place during the first quarter of last year, and a reduction in advertising, including the frequency of mid-week circulars this year.

In a big lift to the bottom line, Kmart slashed costs 29.3 percent, to $1 billion from $1.4 billion last year, yielding a cash savings of $417 million. Measured as a percentage of sales, costs were whittled 120 basis points, or 1.2 percentage points, to 21.8 percent from 23 percent last year.

Kmart said the deep cuts in costs "resulted from reduced payroll and related expenses in stores during the current quarter, as well as the impact of store closings and the corporate cost-reduction initiatives implemented in the first quarter of 2003. Also impacting the decline was a reduction in advertising expenses."

In a further big assist, average gross margin swelled 160 basis points, or 1.6 percentage points, to 24.6 percent from 23 percent a year ago. "Favorably affecting the gross margin rate," the retailer said, "were fewer clearance markdowns and reduced depreciation expense as a result of the write-off of long-lived assets in conjunction with the application of fresh-start accounting."

Improving the company's liquidity position, Kmart kept a watchful eye on stockpiles, reducing inventories $3.4 billion, or more than 23 percent, from the year-before levels of $4.4 billion, representing a reduction in spending of slightly more than a billion dollars over the past 12 months. Julian Day, president and CEO, commented, "We apply similar rigor to managing the productivity of our capital assets, focusing on the need to allocate those assets to their best use."

Day added, "We are delighted with the progress we've made in our business."