<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 26, 1994
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission File No. 1-327
Kmart Corporation
(Exact name of registrant as specified in its charter)
Michigan 38-0729500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Big Beaver Road - Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 643-1000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Number of shares of Common Stock outstanding at November 23, 1994: 456,936,006
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KMART CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- --------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 8,794 $ 8,098 $ 25,432 $ 23,889
Licensee fees and rental income 65 70 198 194
Equity in income of affiliated retail companies 26 15 59 54
--------- ---------- -------- ---------
8,885 8,183 25,689 24,137
--------- ---------- -------- ---------
Cost of merchandise sold (includes buying and occupancy costs) 6,657 5,987 19,134 17,762
Selling, general and administrative expenses 2,036 1,898 5,952 5,567
Interest expense:
Debt -- net 73 76 197 225
Capital lease obligations and other 60 46 176 144
--------- ---------- -------- ---------
8,826 8,007 25,459 23,698
--------- ---------- -------- ---------
Income from continuing retail operations before income taxes 59 176 230 439
Income taxes 20 72 79 152
--------- ---------- -------- ---------
Net income from continuing retail operations before
extraordinary item and the effect of accounting changes 39 104 151 287
Discontinued operations including the effect of accounting
changes, net of income taxes of $(4) and $(3), respectively -- (10) -- (26)
Extraordinary item, net of income taxes of $(6) -- -- -- (10)
Effect of accounting changes, net of income taxes of $(37) -- -- -- (32)
--------- ---------- -------- ---------
Net income $ 39 $ 94 $ 151 $ 219
========= ========== ======== =========
Earnings per common and common equivalent share:
Net income from continuing retail operations before
extraordinary item and the effect of accounting changes $ .08 $ .22 $ .32 $ .61
Discontinued operations including the effect of accounting
changes, net of income taxes -- (.02) -- (.05)
Extraordinary item, net of income taxes -- -- -- (.02)
Effect of accounting changes, net of income taxes -- -- -- (.07)
--------- ---------- -------- ---------
$ .08 $ .20 $ .32 $ .47
========= ========== ======== =========
Dividends declared per common share $ .24 $ .24 $ .72 $ .72
========= ========== ======== =========
Weighted average shares 456.8 457.1 456.2 456.6
========= ========== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The consolidated statements of income for the prior periods have been
restated for discontinued operations.
2
<PAGE> 3
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27, JANUARY 26,
1994 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (includes temporary investments of $121, $78 and $32,
respectively) $ 375 $ 534 $ 449
Merchandise inventories 9,549 10,517 7,252
Accounts receivable and other current assets 1,680 1,571 1,235
Discontinued operations 611 -- 911
--------- --------- ---------
Total current assets 12,215 12,622 9,847
Investments in Affiliated Retail Companies 649 545 606
Property and Equipment -- net 6,399 6,808 5,886
Other Assets and Deferred Charges 324 407 469
Goodwill -- net of accumulated amortization of $73, $117 and $59,
respectively 698 1,222 696
--------- --------- ---------
$ 20,285 $ 21,604 $ 17,504
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 249 $ 75 $ 390
Notes payable 3,300 3,034 918
Accounts payable -- trade 3,512 3,857 2,763
Accrued payrolls and other liabilities 1,289 1,201 1,347
Taxes other than income taxes 418 440 271
Income taxes 75 97 35
--------- --------- ---------
Total current liabilities 8,843 8,704 5,724
Capital Lease Obligations 1,865 1,732 1,720
Long-Term Debt 2,022 2,757 2,227
Other Long-Term Liabilities (includes store restructuring obligations) 1,596 774 1,740
Deferred Income Taxes -- 239 --
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized;
Series A, 5,750,000 shares authorized and issued
at October 27, 1993 and January 26, 1994 -- 986 986
Series C, 796,827 shares authorized; 784,938 shares issued 157 157 157
Common stock, 1,500,000,000 shares authorized; shares
issued 462,782,539, 416,382,774 and 416,546,780, respectively 463 416 417
Capital in excess of par value 1,484 532 538
Performance restricted stock deferred compensation (2) (3) (3)
Retained earnings 4,035 5,560 4,237
Treasury shares (88) (111) (109)
Foreign currency translation adjustment (90) (139) (130)
--------- --------- ---------
Total shareholders' equity 5,959 7,398 6,093
--------- --------- ---------
$ 20,285 $ 21,604 $ 17,504
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(Unaudited)
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------
OCTOBER 26, OCTOBER 27,
1994 1993
----------- -----------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income from continuing retail operations before extraordinary
item and the effect of accounting changes $ 151 $ 287
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization 587 515
Deferred income taxes 143 49
Decrease in other long-term liabilities (171) (27)
Other -- net 107 9
Cash used for current assets and current liabilities (1,775) (1,328)
------- -------
Total cash used for continuing retail operations (958) (495)
------- -------
Discontinued Operations
Proceeds from the sale of discontinued operations -- net 590 --
Loss from discontinued operations -- (26)
Other -- net -- 50
Cash used for discontinued operations (332) --
------- -------
Total cash provided by discontinued operations 258 24
------- -------
Net cash used for operations (700) (471)
------- -------
INVESTING
Capital expenditures -- owned property (929) (838)
Acquisitions (12) (268)
Proceeds from the sale of assets 6 31
Other -- net (71) (41)
------- -------
Net cash used for investing (1,006) (1,116)
------- -------
FINANCING
Proceeds from issuance of long-term debt and notes payable 2,433 2,447
Reduction in long-term debt and notes payable (398) (522)
Reduction in capital lease obligations (88) (85)
Capital contributions from minority interest 26 --
Issuance of common stock 7 12
Reissuance of treasury shares 21 23
Extraordinary item for bond redemptions -- (10)
Dividends paid (369) (355)
------- -------
Net cash provided by financing 1,632 1,510
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (74) (77)
Cash and Equivalents at Beginning of Year 449 611
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 375 $ 534
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Certain prior year amounts have been restated for the effect of discontinued
operations.
4
<PAGE> 5
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not
include all information and footnotes necessary for the annual presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles.
In the opinion of Kmart Corporation, all adjustments necessary for a
fair statement of the results for the interim periods have been included. All
adjustments were of a normal and recurring nature.
SUBSEQUENT EVENTS
In November 1994, Initial Public Offerings (IPO's) of shares in
OfficeMax, Inc. and The Sports Authority, Inc. were completed. The IPO of
OfficeMax reduced Kmart's interest in the company from over 90% to
approximately 25% and resulted in net proceeds of $642 which were paid to
Kmart. The IPO of The Sports Authority reduced Kmart's interest in the company
from 100% to approximately 30% and resulted in net proceeds of $254 which were
paid to Kmart.
In November 1994, Kmart Corporation completed the sale of its 21.5%
equity interest in Coles Myer, Ltd., the Australian retailer. Cash proceeds of
approximately $928 were realized from the sale of this equity interest. As
part of the transaction, Kmart extended a long-term license that allows Coles
Myer to use the "Kmart" name in Australia and New Zealand.
The funds from these transactions will be used to pay down debt,
further the company's modernization program and strengthen Kmart's overall
financial position. The net gain from the transactions is estimated at between
$130 and $160 pending resolution of certain tax issues.
DISCONTINUED OPERATIONS
Discontinued operations include the results of PayLess Drug Stores
Northwest, Inc. and PACE Membership Warehouse, Inc. which have been
reclassified to reflect the respective plans for disposition announced in the
fourth quarter of 1993. In January 1994, PACE sold to Sam's Club, a division
of Wal-Mart, the assets and lease obligations of 93 of its warehouses and
virtually all of the inventory and membership files in the 34 warehouses not
included in the transaction. Operations of the 34 remaining PACE sites not
included in the transaction were discontinued, and PACE is in the process of
marketing these leased sites as well as leased premises for unopened warehouses
and corporate facilities.
In addition, in April 1994, Kmart sold its PayLess Drug Stores
subsidiary to Thrifty PayLess Holdings, Inc. (TPH) and its subsidiary Thrifty
PayLess, Inc. for approximately $595 in cash, $100 in Senior Notes of TPH and
approximately 46% of the common equity of TPH. Of the cash proceeds, $50 was
invested in Senior Subordinated Notes of Thrifty PayLess, Inc. which Kmart
subsequently sold in May 1994 at a slight premium. It is Kmart Corporation's
intention to divest substantially all of its interest in TPH within one year.
Management expects the disposition to be achieved either through a private
offering or other alternative means. Accordingly, Kmart Corporation has
reported PayLess as a discontinued operation and has recorded its investment in
TPH at net realizable value.
In June 1994, Kmart Corporation called for early redemption of all
$300 of its 8 3/8% debentures due January 15, 2017 using the proceeds of the
sale of the PayLess Drug Stores subsidiary to redeem the issue. The resulting
redemption premium and associated cost of $18, net of applicable income taxes,
was recorded in the fourth quarter of 1993 as part of the loss on disposal of
discontinued operations. Kmart Corporation's current short-term and long-term
borrowing rates at the time of the call were 4.50% and 8.65%, respectively.
5
<PAGE> 6
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Dollars in millions, except per-share data)
(Unaudited)
EXTRAORDINARY ITEM AND ACCOUNTING CHANGES
In August 1993, Kmart Corporation called for early redemption of all
$200 of its 8 1/8% debentures due January 1, 1997. The debentures were
redeemed at 100% of the principal amount plus interest accrued to the date of
redemption. In April 1993, Kmart Corporation called for early redemption of
all $200 of its 10 1/2% Sinking Fund Debentures due December 1, 2017. The
resulting redemption premium of $10, net of applicable income taxes, has been
reported as an extraordinary item.
Kmart Corporation adopted Financial Accounting Standard No. 109
"Accounting for Income Taxes" (FAS 109) in the first quarter of 1993. FAS 109
requires that deferred taxes be calculated using the liability approach rather
than the deferred method. In addition, the standard requires adjustment of
deferred tax liabilities to reflect enacted changes in the statutory federal
income tax rate. As a result of the adjustment of deferred tax balances to the
enacted tax rate at the date of adoption, a benefit of $45, or $0.10 per share,
was recorded in the first quarter of 1993 as the cumulative effect of the
accounting change.
Kmart Corporation also adopted Financial Accounting Standard No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106) at the beginning of fiscal 1993. This statement requires that Kmart
Corporation accrue for future postretirement medical benefits. In prior years,
these claims were expensed when paid. Net of applicable tax, a charge of $77,
or $0.17 per share, was included in net income in the first quarter of 1993 as
the effect of an accounting change.
INVENTORIES AND COST OF MERCHANDISE SOLD
A substantial portion of the inventories is accounted for using the
last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of
inventory accounting had been used by Kmart Corporation, inventories would have
been $861, $1,045 and $861 higher than reported at October 26, 1994, October
27, 1993 and January 26, 1994, respectively.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Dollars in millions, except per-share data)
(Unaudited)
SHAREHOLDERS' EQUITY
In October 1992, Kmart Corporation issued 784,938 shares of Series B
convertible preferred stock in exchange for all outstanding stock of Borders,
Inc. As of July 8, 1994, all outstanding shares of Series B convertible
preferred stock were exchanged for 784,938 shares of Series C convertible
preferred stock. The Series C convertible preferred stock has substantially
the same terms as the Series B convertible preferred stock, i.e., each share of
Series C convertible preferred stock is convertible by the holders at any time
into 6.49 shares of common stock, subject to adjustment in certain events, and
is redeemable for Kmart common stock by Kmart Corporation after November 1,
1999 at a redemption rate based on the then-current market price of the common
stock. In addition, the holders have the right to compel the Company to call
for redemption into Kmart common stock, at a redemption rate based on the
then-current market price of the common stock, up to 25% of outstanding Series
C convertible preferred shares between the date of issuance and December 15,
1995, up to 50% of outstanding Series C shares between December 16, 1995 and
November 1, 1997 and up to all outstanding Series C shares after November 1,
1997.
In August 1991, Kmart Corporation sold 23,000,000 $3.41 Depositary
Shares, each representing one-quarter of a share of Series A conversion
preferred stock, for $44 per Depositary Share. On September 15, 1994, each of
the outstanding Depositary Shares automatically converted into two shares of
Kmart common stock . The conversion rate had been adjusted to reflect the
common stock split distributed June 5, 1992. A total of 46,000,000 shares of
common stock were issued or issuable in the conversion of the Series A
conversion preferred stock.
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27, JANUARY 26,
1994 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Preferred Stock -- 10,000,000 shares authorized:
Series A conversion preferred stock; 5,750,000 shares
authorized and issued at October 27, 1993 and January 26, 1994 $ -- $ 986 $ 986
Series A junior participating preferred stock;
500,000 shares designated; none issued -- -- --
Series C convertible preferred stock; 796,827 shares
authorized; 784,938 shares issued 157 157 157
Common Stock -- 1,500,000,000 shares authorized; shares issued
462,782,539, 416,382,774 and 416,546,780, respectively 463 416 417
Capital in Excess of Par Value 1,484 532 538
Performance Restricted Stock Deferred Compensation (2) (3) (3)
Retained Earnings:
Balance at beginning of fiscal year 4,237 5,700 5,700
Net income 151 219 (974)
Cash dividends declared:
Common stock (307) (293) (392)
Series A conversion preferred stock (39) (59) (78)
Series C convertible preferred stock (7) (7) (9)
Minimum pension liability in excess of intangible
pension asset -- -- (10)
------ ------ ------
Total Retained Earnings 4,035 5,560 4,237
Less: Treasury Stock -- 6,051,363, 7,731,825 and 7,468,564
shares, at cost, respectively (88) (111) (109)
Cumulative Foreign Currency Translation Adjustment (90) (139) (130)
------ ------ ------
Total Shareholders' Equity $5,959 $7,398 $6,093
====== ====== ======
</TABLE>
7
<PAGE> 8
KMART CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 13 WEEKS ENDED OCTOBER 26, 1994
Kmart Corporation's store activity during the third quarter of 1994 is
summarized as follows:
<TABLE>
<CAPTION> THIRD QUARTER
ACTIVITY
IN OPERATION AT ----------------------- IN OPERATION AT
JULY 27, 1994 OPENED CLOSED OCTOBER 26, 1994
----------------- ------ ------ ----------------
<S> <C> <C> <C> <C>
General Merchandise
-------------------
Kmart
United States 2,326 30 (13) 2,343
Canada 125 2 -- 127
Czech Republic and Slovakia 13 -- -- 13
Mexico 2 -- -- 2
Singapore 1 1 -- 2
Other 21 -- -- 21
-------- --------- -------- -------
Total General Merchandise 2,488 33 (13) 2,508
------- --------- -------- -------
Specialty Retail
----------------
Borders-Walden Group 1,169 17 (9) 1,177
Builders Square 181 14 (11) 184
OfficeMax 332 20 -- 352
The Sports Authority 85 11 -- 96
------- --------- -------- -------
Total Specialty Retail 1,767 62 (20) 1,809
------- --------- -------- -------
Total Stores 4,255 95 (33) 4,317
======= ========= ======= =======
</TABLE>
In September 1994, Kmart Corporation announced the closing of 110
Kmart stores, which do not meet the company's sales, profit and return on
investment requirements, consistent with the 1993 restructuring plan announced
in January 1994. These stores will be closed permanently by February 1995.
In November 1994, Initial Public Offerings (IPO's) of shares in
OfficeMax, Inc. and The Sports Authority, Inc. were completed. The IPO of
OfficeMax reduced Kmart's interest in the company from over 90% to
approximately 25% and resulted in net proceeds of $642 which were paid to
Kmart. The IPO of The Sports Authority reduced Kmart's interest in the company
from 100% to approximately 30% and resulted in net proceeds of $254 which were
paid to Kmart.
In November 1994, Kmart Corporation completed the sale of its 21.5%
equity interest in Coles Myer, Ltd., the Australian retailer. Cash proceeds of
approximately $928 were realized from the sale of this equity interest. As
part of the transaction, Kmart extended a long-term license that allows Coles
Myer to use the "Kmart" name in Australia and New Zealand.
The funds from these transactions will be used to pay down debt,
further the company's modernization program and strengthen Kmart's overall
financial position. The net gain from the transactions is estimated at between
$130 and $160 pending resolution of certain tax issues.
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Sales for the 13 weeks ended October 26, 1994 were $8.79 billion, an
8.6% increase over sales of $8.10 billion in the same period in the prior year
(see table below). Sales in the core U.S. Kmart division strengthened in the
third quarter, with comparable store sales increasing 2.7%, in contrast to a
0.7% decline in the first half of the year. Third-quarter sales were affected
by buying patterns that were more heavily weighted toward promotional items and
other lower-margined merchandise, and by lower customer traffic. These buying
patterns reflected in part the effects of warm weather in late September and
early October, compared with the same period in the prior year, which curtailed
customer purchasing of fall apparel lines with significant negative
consequences for both sales and margins.
<TABLE>
<CAPTION>
13 WEEKS ENDED
-------------------------- % CHANGE
OCTOBER 26, OCTOBER 27, -----------------------------------
SALES ($ MILLIONS) 1994 1993 ALL STORES COMPARABLE STORES
------------------ ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
General Merchandise
-------------------
United States $ 6,733 $ 6,314 6.6 2.7
International 287 245 17.1 7.3 (a)
------- -------
Total General Merchandise 7,020 6,559 7.0 2.9
Specialty Retail
-----------------
Borders-Walden Group 324 299 8.4 -- (b)
Builders Square 762 705 8.1 4.8
OfficeMax 493 393 25.4 14.9
The Sports Authority 195 142 37.3 4.2
------- -------
Total Specialty Retail 1,774 1,539 15.3 6.3
------- -------
Consolidated $ 8,794 $ 8,098 8.6 3.5
======= =======
</TABLE>
(a) International comparable store sales change is calculated on sales in the
applicable local currency.
(b) Borders sales in millions were $98 and $51 in the 1994 and 1993 periods,
respectively, and Walden Book Company sales were $225 and $248 in the
respective periods. Comparable store sales were up 15.4% at Borders and
down 2.4% at Walden Book Company.
Cost of merchandise sold, including buying and occupancy costs, for
the 13 weeks ended October 26, 1994 was $6,657 million as compared to $5,987
million in the same period in the prior year. Gross margin as a percent of
sales was 24.3% and 26.1% in the 1994 and 1993 periods, respectively. The
decrease, as a percent of sales, primarily reflects a mix in U.S. Kmart stores
of both apparel and hardline sales heavily weighted toward promotional items
and other lower-margined merchandise. The effect of lower than expected sales
on fixed occupancy costs also exerted pressure on gross margins. The impact
of deflation on inventories, which is included in the cost of merchandise
sold, increased pretax earnings by $13 million for the third quarter of 1994
and $15 million for the comparable period of 1993.
Selling, general and administrative expense for the 13 weeks ended
October 26, 1994 was $2,036 million, or 23.2% of sales, as compared to $1,898
million, or 23.4% of sales, in the same period in the prior year, despite a
lower than expected year-to-year sales increase. Company-wide results
benefited from stronger sales, compared with the same period in the prior year,
cost-cutting and productivity improvement programs initiated and implemented to
date.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Operating income from continuing retail operations for the 13 weeks
ended October 26, 1994 was $168 million, or 1.9% of sales, as compared to $284
million, or 3.5% of sales, in the same period in the prior year (see table
below). The decrease in operating income resulted from the lower gross margin
as a percent of sales related to lower than expected sales and a sales mix
heavily weighted toward promotional items and other lower-margined merchandise
in the U.S. Kmart store division.
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------------
OCTOBER 26, OCTOBER 27,
OPERATING INCOME ($ MILLIONS) 1994 1993 % CHANGE
- ------------------------------ ---------- ----------- --------
<S> <C> <C> <C>
General Merchandise
-------------------
United States $ 141 $ 245 (42.4)
International 7 13 (46.2)
----- -----
Total General Merchandise 148 258 (42.6)
Specialty Retail
-----------------
Borders-Walden Group -- -- --
Builders Square 1 18 (94.4)
OfficeMax 19 6 --
The Sports Authority -- 2 --
----- -----
Total Specialty Retail 20 26 (23.1)
----- -----
Consolidated $ 168 $ 284 (40.8)
===== =====
</TABLE>
Net interest expense for the 13 weeks ended October 26, 1994 was $133
million, or 1.5% of sales, as compared to $122 million, or 1.5% of sales, in
the same period in the prior year. Capital lease obligations and other
interest expense increased $14 million, primarily reflecting the interest
expense related to the discounting of closed store lease obligations included
in the 1993 store restructuring reserve.
Income from continuing retail operations before income taxes for the
13 weeks ended October 26, 1994 was $59 million, or 0.7% of sales, as compared
to $176 million, or 2.2% of sales, in the same period in the prior year.
Income tax expense for the 13 weeks ended October 26, 1994 was $20
million with an effective tax rate of 34.5% as compared to $72 million with an
effective tax rate of 40.9% in the same period of 1993. The 1993 rate included
the cumulative effect of the 1% increase in the federal corporate tax rate
retroactive to January 1, 1993 and the approximate $8 million effect on the
deferred tax balance as required by Financial Accounting Standard No. 109.
Net income from continuing retail operations before extraordinary
item and the effect of accounting changes for the 13 weeks ended October 26,
1994 was $39 million, or 0.4% of sales, as compared to $104 million, or 1.3% of
sales, in the same period in the prior year.
Net loss from discontinued operations for the 13 weeks ended October
27, 1993 was $10 million. Discontinued operations included the results of
PayLess Drug Stores Northwest, Inc. and PACE Membership Warehouse, Inc. which
have been reclassified to reflect their respective dispositions announced in
the fourth quarter of 1993.
As a result of the foregoing factors, net income for the 13 weeks
ended October 26, 1994 was $39 million, or 0.4% of sales, as compared to $94
million, or 1.2% of sales, in the same period in the prior year.
10
<PAGE> 11
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
RESULTS OF OPERATIONS 39 WEEKS ENDED OCTOBER 26, 1994
Kmart Corporation's store activity during the 39 weeks ended October 26, 1994
is summarized as follows:
<TABLE>
<CAPTION> YEAR-TO-DATE
ACTIVITY
IN OPERATION AT ------------------------------ IN OPERATION AT
JANUARY 26, 1994 OPENED CLOSED OCTOBER 26, 1994
---------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
General Merchandise
- -------------------
Kmart
United States 2,323 83 (63) 2,343
Canada 127 2 (2) 127
Czech Republic and Slovakia 13 -- -- 13
Mexico -- 2 -- 2
Singapore -- 2 -- 2
Other 23 6 (8) 21
----- --- ---- -----
Total General Merchandise 2,486 95 (73) 2,508
----- --- ---- -----
Specialty Retail
- ----------------
Borders-Walden Group 1,203 34 (60) 1,177
Builders Square 177 28 (21) 184
OfficeMax 328 34 (10) 352
The Sports Authority 80 16 -- 96
----- --- ---- -----
Total Specialty Retail 1,788 112 (91) 1,809
----- --- ---- -----
Total Stores 4,274 207 (164) 4,317
===== === ==== =====
</TABLE>
In September 1994, Kmart Corporation announced the closing of 110 Kmart
stores, which do not meet the company's sales, profit and return on investment
requirements, consistent with the 1993 restructuring plan announced in January
1994. These stores will be closed permanently by February 1995.
In November 1994, Initial Public Offerings (IPO's) of shares in
OfficeMax, Inc. and The Sports Authority, Inc. were completed. The IPO of
OfficeMax reduced Kmart's interest in the company from over 90% to approximately
25% and resulted in net proceeds of $642 which were paid to Kmart. The IPO of
The Sports Authority reduced Kmart's interest in the company from 100% to
approximately 30% and resulted in net proceeds of $254 which were paid to Kmart.
In addition to the store activity noted above, during the 39 weeks ended
October 26, 1994, U.S. Kmart completed 29 expansions and 6 refurbishments as
compared to 45 expansions and 7 refurbishments during the 1993 period.
The activity in total number of stores closed/relocated, expanded or
refurbished to date, together with the dollar amounts relating thereto, were
substantially consistent with those contained in the 1993 restructuring plan. As
market and other conditions change, Kmart Corporation will continue to refine
that plan and make whatever adjustments necessary as required. In addition,
Kmart Corporation is continuing cost-cutting actions and is currently
implementing planned productivity improvements to reduce costs.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Sales for the 39 weeks ended October 26, 1994 were $25.4 billion, a
6.5% increase over sales of $23.9 billion in the same period in the prior year
(see table below). Comparable store sales for the 39 week period increased
1.6% over the same period in the prior year. Comparable store sales in the
first part of the year were affected by the inventory mix adjustments and
reductions made in late 1993 and early in 1994 in the U.S. Kmart store division
which contributed to lower store traffic. Sales in the core U.S. Kmart
division strengthened in the third quarter of 1994 with comparable store sales
increasing 2.7%, in contrast to a 0.7% decline in the first half of the year.
However, sales were affected by buying patterns that were more heavily weighted
toward promotional items and other lower-margined merchandise.
<TABLE>
<CAPTION>
39 WEEKS ENDED
-------------------------- % CHANGE
OCTOBER 26, OCTOBER 27, ----------------------------------
SALES ($ MILLIONS) 1994 1993 ALL STORES COMPARABLE STORES
------------------ ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
General Merchandise
-------------------
United States $ 19,593 $ 18,781 4.3 0.5
International 772 732 5.5 3.7 (a)
-------- --------
Total General Merchandise 20,365 19,513 4.4 0.6
Specialty Retail
-----------------
Borders-Walden Group 952 875 8.8 -- (b)
Builders Square 2,272 2,101 8.1 4.0
OfficeMax 1,273 993 28.2 16.8
The Sports Authority 570 407 40.0 5.6
-------- --------
Total Specialty Retail 5,067 4,376 15.8 6.3
-------- --------
Consolidated $ 25,432 $ 23,889 6.5 1.6
======== ========
</TABLE>
(a) International comparable store sales change is calculated on sales in the
applicable local currency.
(b) Borders sales in millions were $255 and $139 in the 1994 and 1993
periods, respectively, and Walden Book Company sales were $697 and $736
in the respective periods. Comparable store sales were up 17.9% at
Borders and up 0.3% at Walden Book Company.
Cost of merchandise sold, including buying and occupancy costs, for
the 39 weeks ended October 26, 1994 was $19,134 million as compared to $17,762
million in the same period in the prior year. Gross margin as a percent of
sales was 24.8% and 25.6% in the 1994 and 1993 periods, respectively. The
decrease, as a percent of sales, reflects the effect of lower than expected
comparable store sales on fixed occupancy costs and a mix in U.S. Kmart stores
heavily weighted toward promotional items and other lower-margined merchandise.
There was no pretax LIFO charge effect for the first 39 weeks of 1994, in
contrast to a charge of $11 million in 1993.
Selling, general and administrative expense for the 39 weeks ended
October 26, 1994 was $5,952 million, or 23.4% of sales, as compared to $5,567
million, or 23.3% of sales, in the same period in the prior year. The increase
as a percent of sales resulted from lower than expected comparable store sales
which more than offset the cost control programs that have been implemented at
the U.S. Kmart store division.
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Operating income from continuing retail operations for the 39 weeks
ended October 26, 1994 was $545 million, or 2.1% of sales, as compared to $754
million, or 3.2% of sales, in the same period in the prior year (see table
below). The decrease in operating income resulted primarily from the lower
gross margin as a percent of sales related to lower than expected sales and a
sales mix heavily weighted toward promotional items and other lower-margined
merchandise in the U.S. Kmart store division.
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------
OCTOBER 26, OCTOBER 27,
OPERATING INCOME ($ MILLIONS) 1994 1993 % CHANGE
- ------------------------------ ---------- ----------- --------
<S> <C> <C> <C>
General Merchandise
-------------------
United States $ 476 $ 694 (31.4)
International 9 16 (43.8)
----- -----
Total General Merchandise 485 710 (31.7)
Specialty Retail
-----------------
Borders-Walden Group (8) (13) 38.5
Builders Square 30 49 (38.8)
OfficeMax 28 -- --
The Sports Authority 10 8 25.0
----- -----
Total Specialty Retail 60 44 36.4
----- -----
Consolidated $ 545 $ 754 (27.7)
===== =====
</TABLE>
Net interest expense for the 39 weeks ended October 26, 1994 was $373
million, or 1.5% of sales, as compared to $369 million, or 1.5% of sales, in
the same period in the prior year. Net interest expense on debt was down 12.4%
in the 1994 39-week period, primarily as a result of reduced borrowings
resulting from lower inventory levels in the 1994 period and the early
retirement of high-cost, long-term debt. Capital lease obligations and other
interest expense increased $32 million as a result of interest expense related
to the discounting of closed store lease obligations included in the 1993 store
restructuring reserve.
Income from continuing retail operations before income taxes for the
39 weeks ended October 26, 1994 was $230 million, or 0.9% of sales, as compared
to $439 million, or 1.8% of sales, in the same period in the prior year.
Income tax expense for the 39 weeks ended October 26, 1994 was $79
million with an effective tax rate of 34.5% as compared to $152 million with an
effective tax rate of 34.6% in the same period of 1993.
Net income from continuing retail operations before extraordinary
item and the effect of accounting changes for the 39 weeks ended October 26,
1994 was $151 million, or 0.6% of sales, as compared to $287 million, or 1.2%
of sales, in the same period in the prior year.
Net loss from discontinued operations for the 39 weeks ended October
26, 1993 was $26 million. Discontinued operations included the results of
PayLess Drug Stores Northwest, Inc. and PACE Membership Warehouse, Inc. which
have been reclassified to reflect their respective dispositions announced in
the fourth quarter of 1993.
Effect of accounting changes. Kmart Corporation adopted Financial
Accounting Standard No. 109 "Accounting for Income Taxes" (FAS 109) in the first
quarter of 1993. FAS 109 requires that deferred taxes be calculated using the
liability approach rather than the deferred method. As a result of the
adjustment of deferred tax balances to the enacted tax rate at the date of
adoption, Kmart Corporation recorded a benefit of $45 million in the first
quarter of 1993 as the cumulative effect of an accounting change.
13
<PAGE> 14
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Kmart Corporation also adopted Financial Accounting Standard No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106) at the beginning of fiscal 1993. This statement requires that Kmart
Corporation accrue for future postretirement medical benefits. In prior years,
these claims were expensed when paid. Net of applicable tax, a charge of $77
million was included in net income in the first quarter of 1993 as the effect
of an accounting change.
In addition, Kmart Corporation adopted Financial Accounting Standard
No. 112 "Employers' Accounting for Postemployment Benefits" (FAS 112) in the
first quarter of 1993. FAS 112 is an extension of the concepts underlying FAS
106 for similar benefits provided to terminated or laid-off employees. The
financial effects of this statement were not material.
As a result of the foregoing factors, net income for the 39 weeks
ended October 26, 1994 was $151 million, or 0.6% of sales, as compared to $219
million, or 0.9% of sales, in the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated by operating, investing and financing activities
as reported in the Consolidated Statements of Cash Flows for the 39 weeks
ending October 26, 1994 are summarized below. The net decrease in cash and
equivalents for the 39 weeks ended October 26, 1994 was $74 million as compared
to $77 million in the same period in the prior year.
Total cash used for continuing retail operations for the 39 weeks
ended October 26, 1994 was $958 million as compared to $495 million in the same
period of 1993. The change is primarily attributable to an increase in
continuing merchandise inventories at October from the respective year ends.
Total merchandise inventories, which were primarily accounted for under the
LIFO method of inventory valuation, decreased to $9,549 million at October 26,
1994 from $10,517 million at October 27, 1993. The decrease was the result of
the discontinued PACE and PayLess inventory balances included at October 27,
1993.
Total cash provided by discontinued operations for the 39 weeks ended
October 26, 1994 was $258 million as compared to $24 million in the same period
last year. The increase was primarily attributable to the proceeds from the
sale of PayLess in 1994.
Net cash used for investing for the 39 weeks ended October 26, 1994
was $1,006 million as compared to $1,116 million in the same period in the prior
year. The decrease was primarily due to the prior year OfficeMax acquisition
of BizMart partially offset by an increase in capital expenditures related to
the U.S. Kmart store modernization program and subsidiaries' expansions. The
39 weeks ended October 26, 1994 reflect the activity for the U.S. Kmart store
modernization program for projects completed and in progress including 41 new
locations, 72 relocations with 180 closings, 48 expansions and 21
refurbishments as compared to 52 new locations, 78 relocations with 89
closings, 51 expansions and 10 refurbishments in the 1993 period. Acquisitions
for the 39 weeks ended October 26, 1994 reflect Borders Group, Inc.'s
acquisition of Planet Music, a six unit music retailer.
Net cash provided by financing of $1,632 million during the 39 weeks
ended October 26, 1994 was due to a net increase in long-term debt and notes
payable of $2,035 million. The $1,510 million provided by financing during the
39 weeks ended October 27, 1993 was attributable to a $1,925 million net
increase in long-term debt and notes payable. The increases in notes payable
were due to the seasonal build-up of merchandise inventories and higher levels
of short-term financing in anticipation of the Coles Myer sale and the
OfficeMax and The Sports Authority Initial Public Offerings.
Kmart Corporation's working capital ratio was 1.4 at October 26, 1994
and 1.5 at October 27, 1993. Total working capital at October 26, 1994 was
$3,372 million compared with $3,918 million at October 27, 1993, a decrease of
$546 million.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as a part of this report:
1. (11) - Information on Computation of Per Share Earnings
(b) Reports on Form 8-K. There was one report on Form 8-K filed by the
Registrant during the 13 weeks ended October 26, 1994. The report, dated
August 19, 1994, included consolidated pro forma statements of income
which give effect to the planned sale of at least 51% interest in the
Borders-Walden Group, OfficeMax, Inc. and The Sports Authority, Inc. if
such transactions occur as of January 26, 1994 and the consolidated pro
forma balance sheet, if such transactions occur as of July 27, 1994.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The signatory hereby acknowledges and adopts the typed form of his name in the
electronic filing of this document with the Securities and Exchange Commission.
Date: December 7, 1994
Kmart Corporation
------------------------
(Registrant)
By T. F. Murasky
------------------------
T. F. Murasky
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(Duly Authorized Officer and
Principal Accounting Officer)
16
<PAGE> 1
KMART CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT 11 - INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Millions, except per-share data) 13 Weeks Ended 39 Weeks Ended
------------------------ ------------------------
October 26, October 27, October 26, October 27,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
I. Earnings per common share assuming no dilution:
(a) Income from continuing retail operations before
extraordinary item and the effect of accounting changes $ 39 $ 104 $ 151 $ 287
(b) Discontinued operations including the effect of
accounting changes, net of income taxes -- (10) -- (26)
(c) Extraordinary item, net of income taxes -- -- -- (10)
(d) Effect of accounting changes, net of income taxes -- -- -- (32)
------ ------ ------ ------
(e) Net income $ 39 $ 94 $ 151 $ 219
====== ====== ====== ======
Weighted average common shares outstanding 456.7 408.4 456.0 407.9
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) -- 46.0 -- 46.0
------ ------ ------ ------
(f) Weighted average number of shares outstanding 456.7 454.4 456.0 453.9
====== ====== ====== ======
Earnings per common share assuming no dilution:
Income from continuing retail operations before
extraordinary item and the effect of accounting changes (a)/(f) $ 0.08 $ 0.23 $ 0.33 $ 0.63
Discontinued operations including the effect
of accounting changes (b)/(f) -- (0.02) -- (0.06)
Extraordinary item (c)/(f) -- -- -- (0.02)
Effect of accounting changes (d)/(f) -- -- -- (0.07)
------ ------ ------ ------
Net income (e)/(f) $ 0.08 $ 0.21 $ 0.33 $ 0.48
====== ====== ====== ======
II. Earnings per common and common equivalent share:
Income from continuing retail operations before
extraordinary item and the effect of accounting changes $ 39 $ 104 $ 151 $ 287
Less--Series C convertible preferred shares dividend declared (2) (2) (7) (7)
------ ------ ------ ------
(g) Adjusted income from continuing retail operations before
extraordinary item and the effect of accounting changes 37 102 144 280
(h) Discontinued operations including the effect of
accounting changes, net of income taxes -- (10) -- (26)
(i) Extraordinary item, net of income taxes -- -- -- (10)
(j) Effect of accounting changes, net of income taxes -- -- -- (32)
------ ------ ------ ------
(k) Adjusted net income $ 37 $ 92 $ 144 $ 212
====== ====== ====== ======
Weighted average common shares outstanding 456.7 408.4 456.0 407.9
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) -- 46.0 -- 46.0
Stock Options --
Common shares assumed issued 0.3 15.8 2.8 15.9
Less--common shares assumed repurchased (0.2) (13.1) (2.6) (13.2)
------ ------ ------ ------
0.1 2.7 0.2 2.7
------ ------ ------ ------
(l) Applicable common shares, as adjusted 456.8 457.1 456.2 456.6
====== ====== ====== ======
Earnings per common and common equivalent share:
Adjusted income from continuing retail operations before
extraordinary item and the effect of accounting changes (g)/(l) $ 0.08 $ 0.22 $ 0.32 $ 0.62
Discontinued operations including the effect
of accounting changes (h)/(l) -- (0.02) -- (0.06)
Extraordinary item (i)/(l) -- -- -- (0.02)
Effect of accounting changes (j)/(l) -- -- -- (0.07)
------ ------ ------ ------
Net income (k)/(l) $ 0.08 $ 0.20 $ 0.32 $ 0.47
====== ====== ====== ======
</TABLE>
<PAGE> 2
KMART CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT 11 - INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Millions, except per-share data) 13 Weeks Ended 39 Weeks Ended
----------------------- ------------------------
October 26, October 27, October 26, October 27,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
III. Earnings per common and common equivalent share
assuming full dilution:
(m) Income from continuing retail operations before
extraordinary item and the effect of accounting changes $ 39 $ 104 $ 151 $ 287
(n) Discontinued operations including the effect of
accounting changes, net of income taxes -- (10) -- (26)
(o) Extraordinary item, net of income taxes -- -- -- (10)
(p) Effect of accounting changes, net of income taxes -- -- -- (32)
------ ------ ------ ------
(q) Net income $ 39 $ 94 $ 151 $ 219
====== ====== ====== ======
Weighted average common shares outstanding 456.7 408.4 456.0 407.9
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) -- 46.0 -- 46.0
Weighted average Series C convertible preferred shares outstanding 10.1 6.8 10.1 6.8
Stock options--
Common shares assumed issued 0.3 16.5 2.8 16.7
Less--common shares assumed repurchased (0.2) (13.3) (2.6) (13.5)
------ ------ ------ ------
0.1 3.2 0.2 3.2
------ ------ ------ ------
(r) Applicable common shares, as adjusted 466.9 464.4 466.3 463.9
====== ====== ====== ======
Earnings per common and common equivalent share
assuming full dilution:
Income from continuing retail operations before
extraordinary item and the effect of accounting changes (m)/(r) $ 0.08 $ 0.22 $ 0.32 $ 0.62
Discontinued operations including the effect
of accounting changes (n)/(r) -- (0.02) -- (0.06)
Extraordinary item (o)/(r) -- -- -- (0.02)
Effect of accounting changes (p)/(r) -- -- -- (0.07)
------ ------ ------ ------
Net income (q)/(r) $ 0.08 $ 0.20 $ 0.32 $ 0.47
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Income and Consolidated Balance Sheets and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-25-1995
<PERIOD-END> OCT-26-1994
<CASH> 294
<SECURITIES> 81
<RECEIVABLES> 681
<ALLOWANCES> 0
<INVENTORY> 9,549
<CURRENT-ASSETS> 12,215
<PP&E> 11,796
<DEPRECIATION> 5,397
<TOTAL-ASSETS> 20,285
<CURRENT-LIABILITIES> 8,843
<BONDS> 2,022
<COMMON> 463
0
157
<OTHER-SE> 5,339
<TOTAL-LIABILITY-AND-EQUITY> 20,285
<SALES> 25,432
<TOTAL-REVENUES> 25,689
<CGS> 19,134
<TOTAL-COSTS> 19,134
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 373
<INCOME-PRETAX> 230
<INCOME-TAX> 79
<INCOME-CONTINUING> 151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
