<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 25, 1995
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
----- -----
As of November 22, 1995, 459,363,016 shares of Common Stock of the Registrant
were outstanding.
1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
- ------ ---------------------
Item 1. Financial Statements
Consolidated Statements of Operations -- 3
13 weeks and 39 weeks ended
October 25, 1995 and October 26, 1994
Consolidated Balance Sheets -- 4
October 25, 1995, October 26, 1994 and
January 25, 1995
Consolidated Statements of Cash Flows -- 5
39 weeks ended October 25, 1995 and
October 26, 1994
Notes to Consolidated Financial 6 - 7
Statements
Item 2. Management's Discussion and Analysis of 8 - 15
Results of Operations and Financial
Condition
PART II OTHER INFORMATION
------- -----------------
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
KMART CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------------- -----------------------------
OCTOBER 25, OCTOBER 26, OCTOBER 25, OCTOBER 26,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 7,975 $ 7,783 $ 23,858 $ 22,638
Licensee fees and other income 66 62 187 195
-------- --------- -------- --------
8,041 7,845 24,045 22,833
-------- --------- -------- --------
Cost of merchandise sold, including buying and
occupancy costs 6,286 5,883 18,618 16,999
Selling, general and administrative expenses 1,834 1,813 5,428 5,319
Gain on pension curtailment -- -- (124) --
Interest expense:
Debt -- net 40 73 152 197
Capital lease obligations and other 56 60 167 176
-------- -------- -------- --------
8,216 7,829 24,241 22,691
-------- -------- -------- --------
Income (loss) from continuing retail operations
before income taxes and equity income (175) 16 (196) 142
Equity in net income of unconsolidated companies 7 12 23 32
Income tax provision (credit) (50) 7 (52) 54
-------- -------- -------- --------
Net income (loss) from continuing retail operations (118) 21 (121) 120
Income (loss) from discontinued operations, net of
income taxes of $0, $13, ($1), and $25, respectively 1 18 (1) 31
Gain (loss) on disposal of discontinued operations,
net of income taxes of $26 and $89, respectively 48 -- (29) --
======== ======== ======= =======
Net income (loss) $ (69) $ 39 $ (151) $ 151
======== ======== ======= =======
Earnings (loss) per common and common equivalent share:
Continuing retail operations $ (.26) $ .04 $ (.28) $ .25
Discontinued operations -- .04 -- .07
Disposal of discontinued operations .11 -- (.06) --
------- ------- ------- -------
$ (.15) $ .08 $ (.34) $ .32
======= ======= ======= =======
Dividends declared per common share $ .12 $ .24 $ .36 $ .72
======= ======= ======= =======
Weighted average shares (millions) 460.1 456.8 459.3 456.2
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The consolidated statements of operations for prior periods have been restated
for discontinued operations.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 25, OCTOBER 26, JANUARY 25,
1995 1994 1995
------- ------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (includes temporary investments of $178, $121 and $93,
respectively) $ 470 $ 375 $ 480
Merchandise inventories 8,409 9,549 7,382
Accounts receivable and other current assets 1,695 1,961 1,325
------- ------- -------
Total current assets 10,574 11,885 9,187
Investments in Affiliated Retail Companies 80 649 368
Property and Equipment -- net 5,900 6,399 6,280
Other Assets and Deferred Charges 508 654 910
Goodwill -- net of accumulated amortization of $9, $73 and $45,
respectively 25 698 284
------- ------- -------
$17,087 $20,285 $17,029
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 9 $ 249 $ 236
Notes payable 1,944 3,300 638
Accounts payable -- trade 3,206 3,512 2,910
Accrued payrolls and other liabilities 1,046 1,289 1,313
Taxes other than income taxes 304 418 272
Income taxes -- 75 257
------- ------- -------
Total current liabilities 6,509 8,843 5,626
Capital Lease Obligations 1,704 1,865 1,777
Long-Term Debt 1,954 2,022 2,011
Other Long-Term Liabilities (includes store restructuring obligations) 1,202 1,596 1,583
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized;
Series C, 790,287 shares authorized; shares issued 654,815,
784,938 and 658,315, respectively 131 157 132
Common stock, 1,500,000,000 shares authorized; shares issued
465,249,073, 462,782,539 and 464,549,561, respectively 465 463 465
Capital in excess of par value 1,514 1,484 1,505
Performance restricted stock deferred compensation (6) (2) --
Retained earnings 3,752 4,035 4,074
Treasury shares (86) (88) (86)
Foreign currency translation adjustment (52) (90) (58)
------- ------- -------
Total shareholders' equity 5,718 5,959 6,032
------- ------- -------
$17,087 $20,285 $17,029
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
------------------------------
OCTOBER 25, OCTOBER 26,
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing retail operations $ (121) $ 120
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 512 587
Deferred income taxes 97 143
Undistributed equity income 29 33
Decrease in other long-term liabilities (180) (171)
Changes in certain assets and liabilities (1,620) (1,726)
----------- -----------
Net cash used for continuing retail operations (1,283) (1,014)
Net cash used for discontinued operations (32) (276)
----------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (1,315) (1,290)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures -- owned property (425) (929)
Proceeds from sale and divestiture -- net 22 590
Proceeds from sale of assets 46 6
Proceeds from discontinued operations 1,045 --
Other -- net (4) (83)
----------- -----------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 684 (416)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes payable 1,258 2,433
Reduction in long-term debt and notes payable (335) (398)
Reduction in capital lease obligations (88) (88)
Dividends paid (226) (369)
Other -- net 12 54
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 621 1,632
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS (10) (74)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 480 449
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 470 $ 375
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Certain prior year amounts have been restated for the effect of discontinued
operations.
5
<PAGE> 6
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1.) BASIS OF PRESENTATION
These interim unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission, and in the opinion of management, reflect all
adjustments (which include normal recurring adjustments) necessary for
a fair statement of the results for the interim periods. These
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the
Company's 1994 Annual Report and Form 10-K filed for the fiscal year
ended January 25, 1995.
Certain reclassifications of prior year balance sheet accounts have
been made to conform to current year presentation. In addition,
certain prior year amounts have been restated for the effect of
divested and discontinued operations and to conform to current
year presentation (see note 3).
2.) SUBSEQUENT EVENTS
In November 1995, the Company completed the sale and recovered the cost
of its investment in certain Senior Notes due from Thrifty PayLess
Holdings, Inc. for $102. These Senior Notes were issued as part of the
Company's sale of PayLess Drugs Stores Northwest, Inc. to Thrifty
Payless Holdings in April 1994. The Company continues to hold a
46% investment in Thrifty PayLess Holdings.
In November 1995, the Company completed the sale of the assets of its
automotive service centers at an estimated net book value of
approximately $100, receiving $50 in cash and the balance in a five
year interest-bearing note. The purchase price is subject to
adjustment based upon a physical inventory of the assets sold.
Under the terms of the agreement, the centers will continue to operate
at Company locations in exchange for various rents and fees for
services provided by the Company.
3.) DISCONTINUED OPERATIONS
In October 1995, The Sports Authority, Inc. completed the public
offering of the remaining equity interest of approximately 25% owned by
the Company. The Company received approximately $151 in aggregate
net proceeds from the offering.
In July 1995, OfficeMax, Inc. completed the public offering of the
remaining equity interest of approximately 30% owned by the Company.
The Company received approximately $360 in aggregate net proceeds
from the offering.
In May 1995, the initial public offering of common shares of Borders
Group, Inc. commenced. The Company sold 87% of its equity interest in
Borders Group, resulting in net proceeds of $493 which were received by
the Company in June 1995. In addition, in July 1995, Borders Group
agreed to purchase all of the Company's remaining 13% interest in
Borders Group resulting in net proceeds of $73 which were received by
the Company in August 1995.
The funds from the above transactions were used to pay down debt. As
the Company no longer owns any interest in the above entities, they are
accounted for as discontinued operations in the accompanying financial
statements. The Company's interest in the results of these operations
was an after-tax loss of $1 during the 39 weeks ended October 25,
1995. The Company also incurred an after-tax loss of $29 on the
disposition of these businesses for the same period.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4.) PENSION CURTAILMENT
In April 1995, the Company introduced a new profit sharing program for
active associates. For 1995, eligible associates will earn benefits
under the existing defined benefit pension plan as well as the new
profit sharing program. Effective January 31, 1996, the defined
benefit pension plan will be frozen and associates will no longer earn
additional benefits under this plan. As a result of freezing the
defined benefit pension plan, the Company recorded a pretax net
curtailment gain of $124 in the first quarter. This curtailment gain
is attributable to the change in net liabilities resulting from the
decision to freeze the defined benefit pension plan. The new profit
sharing program requires a minimum yearly contribution of $30.
5.) INVENTORIES AND COST OF MERCHANDISE SOLD
The Company implemented a new inventory accounting system in 1995 which
provides more precise, detailed departmental information by store.
This system results in a more accurate valuation of inventories and the
recording of gross profit margins during interim periods in a manner
consistent with that used to value inventory at year end. The use of
this more precise interim information will have no effect on annual
results. However, gross profits reported during each of the first
three quarters of fiscal 1995 were lower than those that would have
been reported using the prior method, with an anticipated equivalent
positive effect in the fourth quarter. The new inventory accounting
system contributed to approximately 0.5% and 0.8%, as a percent of
sales, of the gross margin decline during the 13 and 39 weeks ended
October 25, 1995, respectively.
A substantial portion of the Company's inventories is accounted for
using the last-in, first-out (LIFO) method. Since LIFO costs can only
be determined at the end of each fiscal year when inflation rates and
inventory levels are finalized, estimates were used for LIFO in the
interim consolidated financial statements. Inventories valued on
LIFO at October 25, 1995, October 26, 1994 and January 25, 1995,
respectively, were $812, $861 and $804 lower than the amounts that
would have been reported under the first-in, first-out (FIFO) method.
7
<PAGE> 8
ITEM 2
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FOR THE 13 WEEKS ENDED OCTOBER 25, 1995
RESULTS OF OPERATIONS
Store Activity
The Company's store activity for the 13 weeks ended October 25, 1995 is
summarized as follows:
<TABLE>
<CAPTION>
THIRD QUARTER
ACTIVITY
JULY 26, --------------- OCTOBER 25, OCTOBER 26,
General Merchandise 1995 OPENED CLOSED 1995 1994
------- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,232 15 (82) 2,165 2,343
Canada 125 2 -- 127 127
Czech Republic and Slovakia 13 -- -- 13 13
Mexico 4 -- -- 4 2
Singapore 2 1 -- 3 2
Other 2 -- -- 2 21
----- ---- ---- ----- -----
Total General Merchandise 2,378 18 (82) 2,314 2,508
Builders Square 172 3 (7) 168 184
----- ---- ---- ----- -----
Total Stores 2,550 21 (89) 2,482 2,692
===== ==== ==== ===== =====
</TABLE>
In addition to the store activity noted above, during the 13 weeks
ended October 25, 1995, U.S. Kmart completed 4 expansions and 2 refurbishments
as compared to 18 expansions and 3 refurbishments during the 1994 period.
The total dollar activity associated with stores closed/relocated,
expanded or refurbished to date was substantially consistent with that
contained in the 1993 restructuring plan. During the current year, the Company
has slowed down the number of expansions and refurbishments as compared to
those contained in the 1993 restructuring plan due to market and other
condition changes. The Company will continue to refine the plan and make
necessary adjustments.
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
<TABLE>
<CAPTION>
Sales
13 WEEKS ENDED
------------------------- % CHANGE
OCTOBER 25, OCTOBER 26, -------------------------------
($ Millions) 1995 1994 ALL STORES COMPARABLE STORES
----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
General Merchandise
United States $7,012 $6,733 4.1 4.1
International 305 288 5.9 3.7 (a)
------ ------
Total General Merchandise 7,317 7,021 4.2 4.1
Builders Square 658 762 (13.7) (11.1)
------ ------
Consolidated Sales $7,975 $7,783 2.5 2.6
====== ======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
Sales for the 13 weeks ended October 25, 1995 were $7,975 million, a
2.5% increase over sales of $7,783 million in the same period of the prior
year. Comparable store sales increased 2.6% over the same period of the prior
year. Management believes this increase resulted from continued promotional
activity, better in-stock positions and a larger average transaction size.
Sales in the U.S. Kmart division were up 4.1% on a comparable store basis.
Builders Square comparable store sales declined 11.1% during the quarter as
compared to a 6.5% decline experienced in the first half of the year. This
decrease reflects ongoing increased competition in its major markets and
generally weak sales in its industry segment.
Cost of Merchandise Sold, Including Buying and Occupancy Costs
Cost of merchandise sold for the 13 weeks ended October 25, 1995 was
$6,286 million as compared to $5,883 million in the same period of the prior
year. Gross margin as a percent of sales was 21.2% and 24.4% in 1995 and 1994,
respectively. Margins were significantly affected by the aggressive clearance
of discontinued merchandise. The decrease also reflects a mix of both apparel
and hardline merchandise more heavily weighted toward promotional items and
lower-margined merchandise, resulting from increased promotional programs.
Additionally, margins were negatively affected by higher shrinkage and a new
inventory accounting system which provides a more precise interim calculation
of gross margin that contributed approximately 0.5%, as a percent of sales, of
the gross margin decline. Management believes that the use of this more
precise interim information will have no effect on annual results. The impact
of LIFO included in the cost of merchandise sold increased pretax earnings by
$7 million for the 13 weeks ended October 25, 1995 and $13 million for the
comparable period of 1994.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the 13 weeks ended October 25, 1995 were $1,834
million, or 23.0% of sales, as compared to $1,813 million, or 23.3% of sales,
in the same period of the prior year. This decrease as a percent of sales, is
a result of cost reduction initiatives and the leveraging of fixed costs over a
larger sales base, partially offset by the typically higher expense rates
associated with operations of newer stores.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
<TABLE>
<CAPTION>
Operating Income (Loss)
13 WEEKS ENDED
-----------------------------
OCTOBER 25, OCTOBER 26,
($ Millions) 1995 1994
----------- -----------
<S> <C> <C>
General Merchandise
United States $ (81) $ 141
International 5 7
------ ------
Total General Merchandise (76) 148
Builders Square (3) 1
------ ------
Consolidated Operating Income (Loss) $ (79) $ 149
====== ======
</TABLE>
Operating loss for the 13 weeks ended October 25, 1995 was $79
million, or 1.0% of sales, as compared to operating income of $149 million, or
1.9% of sales, in the same period of the prior year. This decrease in
operating income was primarily attributable to reduced gross margins as a
result of aggressive clearance of discontinued inventory, continued heavy
promotional activity, increased shrinkage and the interim gross margin
calculation change resulting from the implementation of a new inventory
accounting system. Results were also affected by weak performances at Builders
Square and the Company's Canadian operation.
Interest Expense
Net interest expense for the 13 weeks ended October 25, 1995 was $96
million, or 1.2% of sales, as compared to $133 million, or 1.7% of sales, for
the same period of the prior year. This decrease was attributable to $17
million of interest income from a favorable litigation settlement, early
retirement of long-term debt and lower average short-term borrowings. The last
two factors resulted from applying the proceeds received from the disposal of
discontinued operations.
Equity in Net Income of Unconsolidated Companies
Equity in net income of unconsolidated companies for the 13 weeks
ended October 25, 1995 was $7 million as compared to $12 million for the same
period of the prior year and consists of equity income related to the Company's
investment in Meldisco, its footwear licensee.
Income Tax Provision (Credit)
Income tax credit for the 13 weeks ended October 25, 1995 was $50
million with an effective tax rate of 29.9% as compared to a provision of $7
million with an effective tax rate of 26.9% in the same period in the prior
year. Effective tax rates in each year were favorably impacted by tax credits
and equity income relative to low income levels.
Discontinued Operations
The net gain and results of discontinued operations for the 13 weeks
ended October 25, 1995 was $49 million and includes $48 million related to a
gain on disposal as compared to net income from discontinued operations of $18
million for the same period of the prior year. The gain on disposal for the 13
weeks ended October 25, 1995 reflected the sale of the Company's remaining
interest in The Sports Authority, while the decrease in income from
discontinued operations is attributable to the various dispositions of the
Company's interests in discontinued operations since late 1994.
Net Income (Loss)
As the result of the combination of the foregoing factors, primarily
reduced gross margins, partially offset by the gain from disposal of
discontinued operations, the net loss for the 13 weeks ended October 25, 1995
was $69 million, or 0.9% of sales, as compared to net income of $39 million, or
0.5% of sales, in the same period of the prior year.
10
<PAGE> 11
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
FOR THE 39 WEEKS ENDED OCTOBER 25, 1995
RESULTS OF OPERATIONS
Store Activity
The Company's store activity for the 39 weeks ended October 25, 1995 is
summarized as follows:
<TABLE>
<CAPTION>
YEAR TO DATE
ACTIVITY
JANUARY 25, --------------- OCTOBER 25, OCTOBER 26,
General Merchandise 1995 OPENED CLOSED 1995 1994
----------- ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,316 48 (199) 2,165 2,343
Canada 128 2 (3) 127 127
Czech Republic and Slovakia 13 -- -- 13 13
Mexico 2 2 -- 4 2
Singapore 2 1 -- 3 2
Other 20 -- (18) 2 21
----- ----- ----- ----- -----
Total General Merchandise 2,481 53 (220) 2,314 2,508
Builders Square 166 12 (10) 168 184
----- ----- ----- ----- -----
Total Stores 2,647 65 (230) 2,482 2,692
===== ===== ===== ===== =====
</TABLE>
In addition to the store activity noted above, during the 39 weeks
ended October 25, 1995, U.S. Kmart completed 9 expansions and 5 refurbishments
as compared to 29 expansions and 6 refurbishments during the 1994 period.
The total dollar activity associated with stores closed/relocated,
expanded or refurbished to date was substantially consistent with that
contained in the 1993 restructuring plan. During the current year, the Company
has slowed down the number of expansions and refurbishments as compared to
those contained in the 1993 restructuring plan due to market and other
condition changes. The Company will continue to refine the plan and make
necessary adjustments.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
<TABLE>
<CAPTION>
Sales
39 WEEKS ENDED
------------------------ % CHANGE
OCTOBER 25, OCTOBER 26, -------------------------------
($ Millions) 1995 1994 All STORES COMPARABLE STORES
----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
General Merchandise
United States $20,962 $19,593 7.0 5.4
International 850 773 10.1 3.8 (a)
------- -------
Total General Merchandise 21,812 20,366 7.1 5.3
Builders Square 2,046 2,272 (10.0) (7.8)
------- -------
Consolidated Sales $23,858 $22,638 5.4 4.1
======= =======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
Sales for the 39 weeks ended October 25, 1995 were $23,858 million, a
5.4% increase over sales of $22,638 million in the same period of the prior
year. Comparable store sales increased 4.1% over the same period of the prior
year. Management believes this increase resulted from continued promotional
activity, better in-stock positions and a larger average transaction size.
Sales in the U.S. Kmart division were up 5.4% on a comparable store basis,
while Builders Square comparable store sales have declined 7.8%. This decrease
reflects ongoing increased competition in its major markets and generally weak
sales in its industry segment.
Cost of Merchandise Sold, Including Buying and Occupancy Costs
Cost of merchandise sold for the 39 weeks ended October 25, 1995 was
$18,618 million as compared to $16,999 million in the same period of the prior
year. Gross margin as a percent of sales was 22.0% and 24.9% in 1995 and 1994,
respectively. Margins have been significantly impacted by the aggressive
clearance of discontinued merchandise. The decrease also reflects a mix of both
apparel and hardline merchandise more heavily weighted toward promotional items
and lower-margined merchandise, resulting from increased promotional programs.
Additionally, margins were negatively affected by higher shrinkage and a new
inventory accounting system which provides a more precise interim calculation
of gross margin that contributed approximately 0.8%, as a percent of sales, of
the gross margin decline. Management believes that the use of this more
precise interim information will have no effect on annual results. The impact
of LIFO included in the cost of merchandise sold reduced pretax earnings by $8
million for the 39 weeks ended October 25, 1995, in contrast to no LIFO charge
for the comparable period of 1994.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the 39 weeks ended October 25, 1995 were $5,428
million, or 22.8% of sales, as compared to $5,319 million, or 23.5% of sales,
in the same period of the prior year. This decrease, as a percent of sales, is
a result of cost reduction initiatives and the leveraging of fixed costs over a
larger sales base, partially offset by the typically higher expense rates
associated with operations of newer stores.
Gain on Pension Curtailment
The net gain on the pension curtailment of $124 million for the 39
weeks ended October 25, 1995 resulted from the decision to replace the defined
benefit pension plan with a profit sharing program. Effective January 31,
1996, the defined benefit pension plan will be frozen and associates will no
longer earn additional benefits under this plan. The curtailment gain is
attributable to the change in net liabilities resulting from the decision to
freeze the defined benefit pension plan. The new profit sharing program
requires a minimum yearly contribution of $30 million.
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
<TABLE>
<CAPTION>
Operating Income
39 WEEKS ENDED
---------------------------
OCTOBER 25, OCTOBER 26,
($ Millions) 1995 1994
----------- -----------
<S> <C> <C>
General Merchandise
United States $ 138 $ 476
International (10) 9
------ ------
Total General Merchandise 128 485
Builders Square (5) 30
------ ------
Total Continuing Operating Income $ 123 $ 515
====== ======
</TABLE>
Operating income for the 39 weeks ended October 25, 1995 was $123
million, or 0.5% of sales, as compared to $515 million, or 2.3% of sales, in
the same period of the prior year. The decrease in operating income was
primarily attributable to reduced gross margins as a result of aggressive
clearance of discontinued inventory, continued heavy promotional activity,
increased shrinkage and the interim gross margin calculation change resulting
from the implementation of a new inventory accounting system. Results were
also affected by weak performances at Builders Square and the Company's
Canadian and Mexican operations.
Interest Expense
Net interest expense for the 39 weeks ended October 25, 1995 was $319
million, or 1.3% of sales, as compared to $373 million, or 1.6% of sales, for
the same period of the prior year. Net interest expense on debt was down 22.8%
in the 39 weeks ended October 25, 1995, primarily a result of $17 million in
interest income from a favorable litigation settlement, early retirement of
long-term debt and lower average short-term borrowings. The last two factors
resulted from applying the proceeds from the disposal of discontinued
operations.
Equity in Net Income of Unconsolidated Companies
Equity in net income of unconsolidated companies for the 39 weeks
ended October 25, 1995 was $23 million as compared to $32 million for the same
period of the prior year and consists of equity income related to the Company's
investment in Meldisco, its footwear licensee.
Income Tax Provision (Credit)
Income tax credit for the 39 weeks ended October 25, 1995 was $52
million with an effective tax rate of 30.0% as compared to a provision of $54
million with an effective tax rate of 31.2% in the same period of 1994.
Effective tax rates in each year were favorably impacted by tax credits and
equity income relative to low income levels.
Discontinued Operations
The net loss and results of discontinued operations for the 39 weeks
ended October 25, 1995 was $30 million and includes $29 million related to the
net loss on disposals, as compared to net income from discontinued operations
of $31 million for the same period of the prior year. The net loss on disposal
for the 39 weeks ended October 25, 1995 reflected the net effect of the sale
of equity interests in Borders Group, OfficeMax and The Sports Authority, while
the decrease in income from discontinued operations is attributable to the
various dispositions of the Company's interest in discontinued operations since
late 1994.
Net Income (Loss)
As the result of the combination of the foregoing factors, primarily
reduced gross margins and the loss from the disposal of discontinued
operations, partially offset by the gain on pension curtailment, the net loss
for the 39 weeks ended October 25, 1995 was $151 million, or 0.6% of sales, as
compared to net income of $151 million, or 0.7% of sales, in the same period of
the prior year.
13
<PAGE> 14
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
LIQUIDITY AND FINANCIAL CONDITION
Historically, the Company's primary sources of working capital have
been cash flows from operations and borrowing through its commercial paper
program. The Company had working capital of $4,065, $3,561, $3,042 and $3,793
million at October 25, 1995, January 25, 1995, October 26, 1994 and January 26,
1994, respectively. Working capital ratios were 1.6:1, 1.6:1, 1.3:1 and 1.7:1,
respectively, at the same periods. The Company's working capital fluctuates in
relation to (i) profitability, (ii) inventory levels during the course of the
year due to seasonality and (iii) the number and timing of new store openings.
As of December 8, 1995, the Company had $2,965 million of available
credit lines, including $2,665 million under a revolving credit facility with
various banks through October 6, 1997 (including $700 million which would
expire October 1996 if not extended by the Company), and $300 million under a
seasonal line of credit through December 29, 1995. Since the end of October
1995, the Company has experienced a general tightening of credit conditions,
including the elimination of commercial paper and certain uncommitted letter of
credit facilities. As a result, the Company has used these revolving credit
lines as its primary source of short-term liquidity and intends to use these
lines to fund the Company's continuing letter of credit requirements. In
addition, the Company may need to restructure certain surety agreements which
could impose additional cash requirements. As of December 8, 1995, $2,429
million was drawn and outstanding under these credit lines, including $140
million to fund the working capital needs of the Company's Canadian subsidiary.
The Company's existing credit availability has been more than
sufficient to meet the Company's liquidity needs through the peak holiday
borrowing season. Generally, the Company is current with its trade vendors and
continues to receive and honor usual and customary trade terms. Based on
current forecasts which are subject to adjustment, the Company expects to be in
a position to substantially pay down its credit facilities after the holiday
season. However, the Company intends to evaluate the appropriate amounts to be
repaid under such facilities or to be retained by the Company to increase its
liquidity. On December 1, 1995, the Company repaid $100 million of such
facilities.
On October 20, 1995, Moody's lowered the Company's debt rating to Baa2
from Baa1 and placed the Company on creditwatch with negative implications; and
on November 7, 1995, Standard & Poor's indicated that the Company would be kept
on creditwatch with a further decision on the Company's rating to be made
sometime after the holiday season. Should the Company be further downgraded
by either Standard & Poor's or Moody's to non-investment grade status (i.e., a
downgrade of two additional notches by either agency), certain of the Company's
real estate related debt, either by their terms or at the option of the
holders, could be required to be repaid in the aggregate principal amount of
$681 million ($37 million of this debt could require early payment if the
Company's credit rating is downgraded a single notch). Approximately $95
million principal amount of such debt relates to real estate of certain of the
Company's former subsidiaries. Of this amount, such former subsidiaries are
primarily responsible for any required early payment of $69 million, and have
an obligation to reimburse the Company as to $26 million. While the Company
has been informed that certain of such former subsidiaries may question their
obligation to reimburse the Company as to a portion of the $26 million, the
Company, on advice of counsel, believes such obligations exist. If the Company
is required to repay $100 million or more of this debt and the Company could
not obtain a waiver or otherwise resolve the matter, it would constitute an
event of default under the Company's revolving credit facilities.
Although no event has occurred with respect to the real estate related
debt referred to above which would require early payment, the Company is
currently in discussions with the holders of the debt to modify the provisions
which contemplate a possible early payment in the event of a credit rating
downgrade in exchange for modifications of the existing terms. These
modifications may include increases in rates and/or fees, the enhancement of
the collateral securing such debt, the shortening of the payment schedule of
such debt or other provisions. There can be no assurance as to the Company's
ability to modify the terms of its existing debt or as to future actions of the
credit rating agencies.
14
<PAGE> 15
KMART CORPORTATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
In the first quarter of 1996, the Company expects to explore the
renegotiation of its bank credit facilities to enhance its credit, liquidity
and financial flexibility and to enable the Company under its current forecast
to meet its committed and other capital needs and scheduled debt repayments
throughout 1996 and later years. In that connection, the Company also intends
to explore other alternatives, including the possible divestiture of additional
non-core assets, sale-leaseback of certain real estate and the sale of debt or
equity securities. In this regard, on December 11, 1995, the Company filed
with the Securities and Exchange Commission a "shelf" registration statement
which, when effective, would permit the Company to offer for sale securities
with an aggregate price of up to $1,200 million. There can be no assurance,
however, as to the Company's ability to effect such modifications in its
capital structure or as to the terms of any such modifications.
Although the Company's liquidity is presently sufficient to meet its
current and, subject to effecting the modifications of the preceding paragraph,
its anticipated needs, should the Company's credit rating be further downgraded
by Standard & Poor's or Moody's (without the Company having obtained
appropriate modifications to the agreements governing the real estate related
debt referred to above) or should providers of goods and services to the
Company tighten credit terms, the Company may need to consider alternative
sources of funds, a reduction in capital expenditures or a more significant
restructuring of its capital structure.
Net cash used for operating activities for the 39 weeks ended October
25, 1995 was $1,315 million as compared to $1,290 million in the same period of
1994. Merchandise inventories, which are primarily accounted for under the
LIFO method of inventory valuation, decreased 11.9% to $8,409 million at
October 25, 1995 from $9,549 million at October 26, 1994. On a FIFO basis,
inventories were up 0.8% excluding the discontinued operations of Borders
Group, OfficeMax and The Sports Authority.
Net cash provided by investing activities was $684 million for the 39
weeks ended October 25, 1995 and was primarily comprised of proceeds from the
disposal of discontinued operations, partially offset by capital expenditures
for new stores and store modernization. Net cash used for investing activities
was $416 million for the 39 weeks ended October 26, 1994 and was primarily
comprised of capital expenditures for new stores and store modernization,
partially offset by proceeds from the divestiture of PayLess. Both 39-week
periods reflect capital expenditures for store modernization projects completed
and in progress.
Net cash provided by financing activities amounted to $621 million
during the 39 weeks ended October 25, 1995 and was primarily attributable to a
net increase in long-term debt and notes payable of $923 million. The $1,632
million provided by financing activities during the 39 weeks ended October 26,
1994, was primarily attributable to a net increase in long-term debt and notes
payable of $2,035 million. The decrease in cash provided by the issuance of
long-term debt and notes payable in 1995 as compared to 1994 was primarily
attributable to lower borrowings resulting from cash proceeds received from the
sale of interests in Borders Group, OfficeMax and The Sports Authority. The
increases in notes payable in both 39-week periods were due to the seasonal
build-up of merchandise inventories.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
Exhibit 11 - Information on Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K: There were no reports on Form 8-K filed by the
Registrant during the 13 weeks ended October 25, 1995.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The signatory hereby acknowledges and adopts the typed form of his name in the
electronic filing of this document with the Securities and Exchange Commission.
Date: December 11, 1995
Kmart Corporation
--------------------------------------
(Registrant)
By: M.P. Rich
--------------------------------------
M.P. Rich
EXECUTIVE VICE PRESIDENT,
STRATEGIC PLANNING,
FINANCE AND ADMINISTRATION
(Duly Authorized Officer,
Principal Financial and Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 -- Information on Computation of Per Share Earnings
27 -- Financial Data Schedule
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
($ Millions, except per share data) --------------------------- --------------------------
October 25, October 26, October 25, October 26,
1995 1994 1995 1994
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
I. Earning per common and common equivalent share:
Income (loss) from continuing retail operations $ (118) $ 21 $ (121) $ 120
Less--Series C convertible preferred shares dividend declared (2) (2) (6) (7)
-------- -------- --------- --------
(a) Adjusted income (loss) from continuing
retail operations (120) 19 (127) 113
(b) Discontinued operations, net of income taxes 1 18 (1) 31
(c) Disposal of discontinued operations, net of income taxes 48 - (29) -
-------- -------- --------- --------
(d) Adjusted net income (loss) $ (71) $ 37 $ (157) $ 144
======== ======== ========= ========
Weighted average common shares outstanding 459.4 456.7 459.1 456.0
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) - - - -
Stock Options--
Common shares assumed issued 7.6 0.3 2.2 2.8
Less--common shares assumed repurchased (6.9) (0.2) (2.0) (2.6)
-------- -------- --------- --------
0.7 0.1 0.2 0.2
-------- -------- --------- --------
(e) Applicable common shares, as adjusted 460.1 456.8 459.3 456.2
======== ======== ========= ========
Earnings per common and common equivalent share:
Adjusted income (loss) from continuing retail operations (a)/(e) $ (0.26) $ 0.04 $ (0.28) $ 0.25
Discontinued operations, net of income taxes (b)/(e) 0.00 0.04 (0.00) 0.07
Disposal of discontinued operations, net of income taxes (c)/(e) 0.11 - (0.06) -
-------- -------- --------- --------
Net income (loss) (d)/(e) $ (0.15) $ 0.08 $ (0.34) $ 0.32
======== ======== ========= ========
II. Earnings per common and common equivalent share
assuming full dilution:
(f) Income (loss) from continuing retail operations $ (118) $ 21 $ (121) $ 120
(g) Discontinued operations, net of income taxes 1 18 (1) 31
(h) Disposal of discontinued operations, net of income taxes 48 - (29) -
-------- -------- --------- --------
(i) Net income (loss) $ (69) $ 39 $ (151) $ 151
======== ======== ========= ========
Weighted average common shares outstanding 459.4 456.7 459.1 456.0
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) - - - -
Weighted average Series C convertible preferred shares outstanding 13.1 10.1 13.1 10.1
Stock Options--
Common shares assumed issued 7.6 0.3 5.3 2.8
Less--common shares assumed repurchased (6.9) (0.2) (4.8) (2.6)
-------- -------- --------- --------
0.7 0.1 0.5 0.2
-------- -------- --------- --------
(j) Applicable common shares, as adjusted 473.2 466.9 472.7 466.3
======== ======== ========= ========
Earnings per common and common equivalent share:
assuming full dilution:
Income (loss) from continuing retail operations (f)/(j) $ (0.25) $ 0.04 $ (0.26) $ 0.25
Discontinued operations, net of income taxes (g)/(j) 0.00 0.04 (0.00) 0.07
Disposal of discontinued operations, net of income taxes (h)/(j) 0.10 - (0.06) -
-------- -------- --------- --------
Net income (loss) (i)/(j) $ (0.15) $ 0.08 $ (0.32) $ 0.32
======== ======== ========= ========
(1) (1) (1) (1)
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
<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-31-1996
<PERIOD-END> OCT-25-1995
<CASH> 360
<SECURITIES> 110
<RECEIVABLES> 637
<ALLOWANCES> 0
<INVENTORY> 8,409
<CURRENT-ASSETS> 10,574
<PP&E> 11,024
<DEPRECIATION> 5,124
<TOTAL-ASSETS> 17,087
<CURRENT-LIABILITIES> 6,509
<BONDS> 1,954
<COMMON> 465
0
131
<OTHER-SE> 5,122
<TOTAL-LIABILITY-AND-EQUITY> 17,087
<SALES> 23,858
<TOTAL-REVENUES> 24,045
<CGS> 18,618
<TOTAL-COSTS> 18,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 317
<INCOME-PRETAX> (173)
<INCOME-TAX> (52)
<INCOME-CONTINUING> (121)
<DISCONTINUED> (30)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (151)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.32)
</TABLE>
