Kmart posts profit; cash pile hits $2.6 billion

Mon Aug 16, 2004
By Emily Kaiser

CHICAGO, Aug 16 (Reuters) - Kmart Holdings Corp. (KMRT.O: Quote, Profile, Research) on Monday reported its third consecutive quarterly profit and boosted its cash pile to $2.6 billion as it cut spending on advertising and discounts, sending its stock up 14 percent.

The third-largest U.S. discount retailer, which emerged from bankruptcy in May 2003, also gave Chairman Edward Lampert authority to invest the company's excess cash, according to a quarterly report filed with the U.S. Securities and Exchange Commission on Monday.

Kmart posted a 15 percent drop in quarterly sales but analysts cheered the $400 million increase in cash and cash equivalents as of July 28. The big cash pile has calmed concerns that Kmart could slide back into bankruptcy, and also prompted questions about how Lampert plans to spend the money.

Richard Hastings, an analyst with credit advisory firm Bernard Sands, said Kmart's gross profit growth suggested that the retailer was selling more high-margin items including clothing and Martha Stewart Everyday (MSO.N: Quote, Profile, Research) merchandise.

The retailer said in its SEC filing that it had not seen any "significant adverse impact" on sales from Martha Stewart's recent conviction for lying about a stock trade.

In January 2002, Troy, Michigan-based Kmart became the largest U.S. retailer ever to file for bankruptcy following a poor holiday shopping season and a failed attempt to match prices with Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) .

Since then, the No. 3 U.S. discount retailer has cut back on advertising, markdowns, payroll and store investments to build up cash.

Kmart has also agreed to sell dozens of its stores in recent weeks, moves that will likely boost its cash holdings to more than $3 billion. Analysts and investors have been pressing the company for details on how it plans to spend the cash.

Wal-Mart, which has revenue more than 10 times the size of Kmart's, listed $3.8 billion in cash and cash equivalents as of April 30 in its most recent quarterly filing with the SEC.

LAMPERT TO INVEST EXCESS CASH

Lampert, who owns just over half of Kmart's stock, is considered a financial whiz, and some investors have asked him whether he plans to turn Kmart into a holding company similar to Warren Buffett's Berkshire-Hathaway Inc. (BRKa.N: Quote, Profile, Research) .

Lampert gave scant details on how he intends to spend the money when the question arose at Kmart's annual meeting in May -- the first and last time he has publicly addressed investors since taking over as chairman upon Kmart's bankruptcy exit.

Monday's SEC filing also contained no details on his investment plans, and a Kmart spokesman declined to comment.

Several Wall Street analysts have written research reports saying that Kmart's real estate is worth far more than its stores, and questioning whether the company plans to sell its roughly 1,400 stores. Kmart has repeatedly denied such speculation, and said it is committed to improving the stores.

In a statement, Kmart Chief Executive Officer Julian Day said the company "will continue our attention on our stores, product assortment and the quality of our customers' shopping experience," and he was pleased with Kmart's fall clothing.

Kmart earned $155 million, or $1.54 per share, in the second quarter ended July 28. That compares with a loss of $5 million, of 6 cents per share, in the same period last year.

Total quarterly sales fell 15.3 percent to $4.79 billion. Sales at stores open at least a year -- a key retail measure known as same-store sales -- dropped 14.9 percent.

The company, which said earlier this month that it was cutting 10 percent of its headquarters staff, said lower payroll and clearance expenses helped boost profit.

The retailer said it reduced its credit agreement to $1.0 billion from $1.5 billion.

Shares of Kmart rose $9.27, or 14.3 percent, to $74.17 on the Nasdaq near midday on Monday.

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