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Archive for Saturday, May 4, 2002

Bankrupt Kmart’s troubles seem to be mounting

May 4, 2002

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— As Kmart Corp. struggles to restructure and define its future under Chapter 11 bankruptcy protection, the company's troubled past keeps getting in the way.

On Thursday, Kmart executives disclosed they were investigating the way the company was managed under former chief executive Charles Conaway, who left in March, and suspending severance pay to several former key executives until the review is completed.

That came on the heels of Wednesday's news that Kmart, which has been reviewing its accounting methods for the past several months, may have to recalculate its losses for the past fiscal year, ended Jan. 30. Furthermore, it said it expects significantly higher losses last year compared to the $244 million loss reported in 2000.

"Kmart needs this like a hole in the head," said Kurt Barnard, president of Barnard's Retail Trend Report, based in Montclair, N.J. "The past is consuming all management's time, and meanwhile, there is still no clear message of what Kmart wants to be in the future."

He added the company's disclosure of its management review comes as "a surprise," and said he is not sure how deep the troubles really are.

Kmart executives are offering few details about the simultaneous accounting and management reviews. It is unclear whether former managers, in fact, improperly handled the accounting. Kmart officials would only say that the accounting inquiry relates to vendor payment, rebates and general liability reserves. Further details of the accounting investigation will be included in Kmart's annual financial statement, which is scheduled to be filed with the Securities and Exchange Commission on May 15.

Kmart said it was probing the company's former "stewardship," but would not say which former top executives were being investigated in the management review. The investigation is expected to be completed by the end of the summer.

The severance pay suspension does not apply to Conaway, who received $4 million as part of his separation agreement, Michael Freitag, a spokesman for Kmart, said.

The overall review was started because of an anonymous letter, claiming to be from employees, that Kmart received in January raising concerns about accounting irregularities and other issues.

Meanwhile, Kmart paid $30 million in loans in December to top executives in an effort to retain them, and is now in the process of recovering some of those loans from certain executives who have left the company.

"We are determining whether those loans should be forgiven," Freitag said.

Marty Zohn, a bankruptcy lawyer, said that even if the company recovers "all the employee loans or overpayments," Kmart is not going to "make a dent in the needs of the company going forward."

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