HBS-Case---Kmart

9-209-044REV:MAY18,2009________________________________________________________________________________________________________________ProfessorStuartC.GilsonandResearchAssociateSarahL.Abbottpreparedthiscase.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2008,2009PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto(A)IadmireMr.Lampertforhisbravery,butIreallydoubtKmartisgoingtosucceed.1—JamesHarris,SenecaFinancialGroupInFebruary2003,KmartCorporationfileditsamendedreorganizationplanwiththeUnitedStatesBankruptcyCourtfortheNorthernDistrictofIllinoisinpreparationforitsplannedexitfrombankruptcy.AfterfilingforbankruptcyinJanuary2002,thecompanyhadspentthepastthirteenmonthsrestructuringitsoperations,itsmanagementteamanditsbalancesheet.Thecompanyhadclosed600ofits2,100stores,andrejectedorrenegotiatedhundredsofunprofitablevendorcontractsandleases.Ithadlaunchednumerousinitiativesdesignedtogrowsalesandimproveprofitability,andre-signedexclusivelicensingdealswithkeymerchandisingpartners(e.g.,MarthaStewartEveryday).Despitetheseachievements,thepresscoverageofKmart’simminentemergencefromchapter11focusedmoreonthetasksthatlayahead.ManyretailindustryanalystsquestionedwhetherKmartwasreadytocomeoutofbankruptcyandwhethermanagementhadmadethechangesnecessaryforKmarttosucceedgoingforward.Theypointedtocontinuedweaksalestrendsandnegativeoperatingcashflowasevidencethatthesechangeshadnotyetbeenmade.Onemanwasbettingheavilythattheyhad.EdwardS.Lampert,throughhishedgefundESLInvestments,hadpurchasedsignificantstakesinKmart’sdiscountedpre-petitionbonds,loansandtradeclaimswhileKmartwasinchapter11.LamperthadalsocommittedtoinvestadditionalcapitalinKmartuponitsemergencefromchapter11,atwhichpointLampertandhisinvestmentpartner,ThirdAvenueManagement,wouldownanestimated51%ofKmart’scommonstockKmart’sreorganizationplanstillhadtobevotedonbyitsclaimholders.ThesevoteswereduebyApril4,andahearingtoapprovetheplanwasscheduledforApril22.1AmyMerrick,“KmartEmergesfromChapter11,Sees2004Profit,”TheWallStreetJournal,May7,2003,p.B6,viaFactiva,accessedJanuary2008.FortheexclusiveuseofX.CAOThisdocumentisauthorizedforuseonlybyXiCaoinSpecialTopicsinFinance:FinancialDistresstaughtbyHaoZoufromSeptember2013toMarch2014.209-044KmartandESLInvestments(A)2BackgroundTheOriginsofKmartIn1889,SebastianS.KresgeopenedthefirstKresgestore,a‘five-and-dime’generalmerchandiseretailer.Overtheyears,Kresgeexpandedhisstorebase,andby1912,therewere85Kresgestoresgeneratingover$10millioninannualsales.In1962,thefirstKmartbrandedstorewasopened.By1966,theretailchainhad162Kmart-brandedstores,73Kresgestores,andgeneratedover$1billioninannualsales.Kmartwasaleaderintheuseofadvertising,andwasthefirstretailertosponsornewspaperadvertisements.Inthemid-1980s,Kmart’smanagementexpandedbeyonddiscountgeneralmerchandising,acquiringothertypesofretailoperations,includingOfficeMax,anofficesupplyretailer;SportsAuthority,asportinggoodsretailer;andtwobookretailers,WaldenBooksandBorders.However,thisexperimentinalternativeretailingformatswasrelativelyshort-lived,andbythemid-1990sKmarthaddivesteditselfofallofthesebusinesses.Kmartopeneditsfirst‘supercenter’in1991.SupercentersweresignificantlylargerthantraditionalKmartstoresandcarriedfoodandgroceriesinadditiontogeneralmerchandise.Whilegroceryitemstendedtohavelowergrossmargins,theywereimportantindrivingstoretrafficascustomerstendedtopurchasethesegoodsmorefrequently.Kmartsupercenterswereopensevendaysaweek,24hoursaday,andincludedfull-servicebakeriesandvideostores.Supercenter-typeshoppingcentershadbeenpopularinEuropeforyears.IntheUnitedStates,theconceptwasintroducedin1988byKmart’scompetitor,Wal-Mart.Followingtheinitialconceptlaunch,bothWal-MartandKmartaggressivelyrolledoutsupercentersnationwide.By2001,Kmartwasthethird-largestdiscountretailerandthefourth-largestgeneralmerchandiseretailerintheUnitedStates.Itoperated2,114stores,including136supercenters,locatedinall50states,PuertoRico,U.S.VirginIslands,andGuam.Ina2003courtfilingthecompanynoted:“Approximately75%oftheU.S.populationshopsatKmarteachyear,andabout85%oftheU.S.populationliveswithin15milesofaKmartstore.”2Kmartstoresweremostlyfree-standing,one-storyunits,ranginginsizefrom40,000to190,000squarefeet,withanaveragesizeof98,000squarefeet.Thestorestendedtobelocatedinmoreurbanareas,withlocationsin300oftheU.S.’s324metropolitanstatisticalareas.3TheDiscountRetailingIndustryIn1960,discountretailstoresintheUnitedStatesgenerated$2billioninannualsales.By2000,industryannualsaleshadgrownto$200billion,reflectingawiderangeofdiscountretailformatsincludingdiscou