<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 July 26, 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 August 23, 1995, 459,368,762 shares of Common Stock of the Registrant
were outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Operations -- 3
13 weeks and 26 weeks ended July 26, 1995 and
July 27, 1994
Consolidated Balance Sheets -- 4
July 26, 1995, July 27, 1994 and
January 25, 1995
Consolidated Statements of Cash Flows -- 5
26 weeks ended July 26, 1995 and
July 27, 1994
Notes to Consolidated Financial 6 - 7
Statements
Item 2. Management's Discussion and Analysis of 8 - 14
Results of Operations and Financial
Condition
PART II OTHER INFORMATION
------- -----------------
Item 4. Submission of Matters to a Vote of Security 15 - 16
Holders
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 26 WEEKS ENDED
------------------------ ---------------------
JULY 26, JULY 27, JULY 26, JULY 27,
1995 1994 1995 1994
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Sales $ 8,440 $ 7,942 $15,883 $ 14,855
Licensee fees and other income 63 73 121 133
-------- --------- ------- --------
8,503 8,015 16,004 14,988
-------- --------- ------- --------
Cost of merchandise sold, including buying and occupancy costs 6,544 5,963 12,332 11,116
Selling, general and administrative expenses 1,827 1,823 3,594 3,506
Gain on pension curtailment -- -- (124) --
Interest expense:
Debt -- net 57 57 112 124
Capital lease obligations and other 57 59 111 116
-------- --------- ------- --------
8,485 7,902 16,025 14,862
-------- --------- ------- --------
Income (loss) from continuing retail operations before income
taxes and equity income 18 113 (21) 126
Equity in net income of unconsolidated companies 15 20 19 26
Income tax provision (credit) 10 43 (1) 47
-------- --------- ------- --------
Net income (loss) from continuing retail operations 23 90 (1) 105
Income (loss) from discontinued operations, net of income taxes
of $3, $(2), and $8, respectively -- 4 (4) 7
Loss on disposal of discontinued operations, net of income taxes
of $63 (77) -- (77) --
-------- --------- ------- --------
Net income (loss) $ (54) $ 94 $ (82) $ 112
======== ========= ======= ========
Earnings (loss) per common and common equivalent share:
Continuing retail operations $ .05 $ .19 $ (.01) $ .22
Income (loss) from discontinued operations -- .01 (.01) .02
Loss on disposal of discontinued operations (.17) -- (.17) --
-------- --------- ------- --------
$ (.12) $ .20 $ (.19) $ .24
======== ========= ======= ========
Dividends declared per common share $ .12 $ .24 $ .24 $ .48
======== ========= ======= ========
Weighted average shares (millions) 459.3 456.1 459.0 456.0
======== ========= ======= ========
</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>
JULY 26, JULY 27, JANUARY 25,
1995 1994 1995
------- -------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (includes temporary investments of $28, $62 and $93, respectively) $ 293 $ 318 $ 480
Merchandise inventories 7,371 8,328 7,382
Accounts receivable and other current assets 1,494 1,749 1,325
------- -------- -------
Total current assets 9,158 10,395 9,187
Investments in Affiliated Retail Companies 149 615 368
Property and Equipment -- net 5,934 6,174 6,280
Other Assets and Deferred Charges 542 652 910
Goodwill -- net of accumulated amortization of $9, $68 and $45,
respectively 25 686 284
------- -------- -------
$15,808 $ 18,522 $17,029
======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 29 $ 229 $ 236
Notes payable 846 1,585 638
Accounts payable -- trade 2,865 3,541 2,910
Accrued payrolls and other liabilities 889 1,220 1,313
Taxes other than income taxes 341 407 272
Income taxes 79 -- 257
------- -------- -------
Total current liabilities 5,049 6,982 5,626
Capital Lease Obligations 1,725 1,791 1,777
Long-Term Debt 1,956 2,042 2,011
Other Long-Term Liabilities (includes store restructuring obligations) 1,232 1,696 1,583
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized;
Series A, 5,750,000 shares authorized and issued at July 27, 1994 -- 986 --
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
465,279,932, 416,772,739 and 464,549,561, respectively 465 417 465
Capital in excess of par value 1,515 543 1,505
Performance restricted stock deferred compensation (7) (2) --
Retained earnings 3,878 4,108 4,074
Treasury shares (86) (95) (86)
Foreign currency translation adjustment (50) (103) (58)
------- -------- -------
Total shareholders' equity 5,846 6,011 6,032
------- -------- -------
$15,808 $ 18,522 $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>
26 WEEKS ENDED
-------------------------
JULY 26, JULY 27,
1995 1994
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing retail operations $ (1) $ 105
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 347 382
Deferred income taxes 164 97
Undistributed equity income 33 34
Decrease in other long-term liabilities (220) (61)
Changes in certain assets and liabilities (689) (453)
----- -----
Net cash provided by (used for) continuing retail operations (366) 104
Net cash used for discontinued operations (79) (318)
----- -----
NET CASH USED FOR OPERATING ACTIVITIES (445) (214)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures -- owned property (258) (562)
Proceeds from sale and divestiture -- net 22 590
Proceeds from sale of assets 10 5
Proceeds from discontinued operations 853 --
Other -- net 3 2
----- -----
NET CASH PROVIDED BY INVESTING ACTIVITIES 630 35
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes payable 161 718
Reduction in long-term debt and notes payable (314) (398)
Reduction in capital lease obligations (59) (59)
Dividends paid (169) (249)
Other -- net 9 36
----- -----
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (372) 48
----- -----
NET DECREASE IN CASH AND EQUIVALENTS (187) (131)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 480 449
----- -----
CASH AND EQUIVALENTS AT END OF PERIOD $ 293 $ 318
===== =====
</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 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 EVENT
In August 1995, The Sports Authority, Inc. filed a registration
statement regarding the proposed public offering of the remaining interest
of approximately 25% in The Sports Authority owned by the Company. In the
proposed offering, the Company would receive the resulting net proceeds.
Upon completion of the proposed offering, the Company will no longer own
any interest in The Sports Authority. Proceeds from this transaction will
be used to pay down debt. The Company will reflect its interest in The
Sports Authority as a discontinued operation in the future.
3.) DISCONTINUED OPERATIONS
In May 1995, the initial public offering (IPO) of shares of Borders
Group, Inc. commenced. The Company sold 87% of its 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 these transactions were used to pay down debt.
In July 1995, OfficeMax, Inc. completed the public offering of the
remaining interest of approximately 30% of OfficeMax owned by the Company.
The Company received approximately $360 in aggregate net proceeds from the
offering. The Company no longer owns any interest in OfficeMax. The funds
from this transaction were used to pay down debt.
The Borders Group, OfficeMax and related transactions have been
accounted for as discontinued operations in the accompanying financial
statements. The Company's interest in the results of these operations was
a $4 after-tax loss during the 26 weeks ended July 26, 1995. The Company
also incurred an after-tax loss of $77 on the disposal of these businesses
for the same period.
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.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
(Unaudited)
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 that will
result in a more accurate valuation of inventories and the recording of
gross profit margins during interim periods in a manner more 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 are anticipated to be lower than those that would have been
reported using the prior method, with an equivalent positive effect in the
fourth quarter. The new inventory accounting system contributed to
approximately 0.2% and 0.7%, as a percent of sales, of the gross margin
decline during the 13 and 26 weeks ended July 26, 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 are used for LIFO in the interim
consolidated financial statements. Inventories valued on LIFO at July 26,
1995, July 27, 1994 and January 25, 1995, respectively, were $818, $874 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 JULY 26, 1995
RESULTS OF OPERATIONS
Store Activity
The Company's store activity for the second quarter of 1995 is summarized as
follows:
<TABLE>
<CAPTION>
SECOND QUARTER
ACTIVITY
APRIL 26, ------------------ JULY 26, JULY 27,
General Merchandise 1995 OPENED CLOSED 1995 1994
------------------- --------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,240 15 (23) 2,232 2,326
Canada 128 -- (3) 125 125
Czech Republic and Slovakia 13 -- -- 13 13
Mexico 4 -- -- 4 2
Singapore 2 -- -- 2 1
Other 17 -- (15) 2 21
------ ----- --- ------ ------
Total General Merchandise 2,404 15 (41) 2,378 2,488
Builders Square 172 2 (2) 172 181
------ ----- --- ------ ------
TOTAL STORES 2,576 17 (43) 2,550 2,669
====== ===== === ====== ======
</TABLE>
In addition to the store activity noted above, during the 13 weeks
ended July 26, 1995, U.S. Kmart completed two expansions and two refurbishments
as compared to seven expansions and three refurbishments during the 1994
period.
In June 1995, the Company announced the closing of 72 U.S. Kmart
stores which do not meet the Company's sales, profit and return on investment
requirements. The stores began closing in late August. All 72 stores are
expected to be closed by the end of the third quarter of 1995.
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, 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
Sales
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------- % CHANGE
JULY 26, JULY 27, ------------------------------------
($ Millions) 1995 1994 ALL STORES COMPARABLE STORES
General Merchandise ---------- ---------- ---------- -----------------
-------------------
<S> <C> <C> <C> <C>
United States $7,386 $6,842 8.0 6.4
International 296 273 8.4 1.3 (a)
------ ------
Total General Merchandise 7,682 7,115 8.0 6.2
Builders Square 758 827 (8.3) (6.8)
------ ------
Consolidated Sales $8,440 $7,942 6.3 5.0
====== ======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
Sales for the 13 weeks ended July 26, 1995, were $8,440 million, a
6.3% increase over sales of $7,942 million in the same period of the prior
year. Comparable store sales increased 5.0% over the same period of the prior
year due primarily to an improved in-stock condition in general merchandise
stores compared with the prior year. Management believes this has resulted in
increased shopper frequency, higher transaction counts, better in-stock
positions and a larger average transaction size.
Cost of Merchandise Sold, Including Buying and Occupancy Costs
Cost of merchandise sold for the 13 weeks ended July 26, 1995, was
$6,544 million as compared to $5,963 million in the same period of the prior
year. Gross margin as a percent of sales was 22.5% and 24.9% in 1995 and 1994,
respectively. This decrease, reflects, in part, a mix of both apparel and
hardline merchandise more heavily weighted toward promotional items and
lower-margined merchandise, which is a result of increased promotional programs
initiated in the third quarter of 1994. Margins were also affected by earlier
clearance of seasonal merchandise and higher shrinkage. In addition, a new
inventory accounting system providing a more precise interim calculation of the
gross margin contributed approximately 0.2%, as a percent of sales, of the
gross margin decline. 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 are anticipated to be lower than
those that would have been reported using the prior method, with an equivalent
positive effect in the fourth quarter. The impact of LIFO included in the cost
of merchandise sold reduced pretax earnings by $8 million for the 13 weeks
ended July 26, 1995 and $2 million for the comparable period of 1994.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the 13 weeks ended July 26, 1995, were $1,827
million, or 21.6% of sales, as compared to $1,823 million, or 23.0% of sales,
in the same period of the prior year. This decrease as a percent of sales is a
result of cost reduction initiatives and the leveraging of fixed costs over a
larger sales base.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
Operating Income (Loss)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------
JULY 26, JULY 27,
($ Millions) 1995 1994 % CHANGE
General Merchandise -------- -------- --------
-------------------
<S> <C> <C> <C>
United States $ 133 $ 201 (33.8)
International (10) 2 --
----- ------
Total General Merchandise 123 203 (39.4)
Builders Square 9 26 (65.4)
----- ------
Consolidated Operating Income $ 132 $ 229 (42.4)
===== ======
</TABLE>
Operating income for the 13 weeks ended July 26, 1995, was $132
million, or 1.6% of sales, as compared to $229 million, or 2.9% of sales, in
the same period in the prior year. This decrease in operating income resulted
primarily from continuing competitive pressures on gross margins and increased
shrinkage, coupled with the interim gross profit calculation change resulting
from implementation of a new inventory accounting system. Operating income was
also affected by weak performances at Builders Square and the Company's
Canadian operations.
Interest Expense
Net interest expense for the 13 weeks ended July 26, 1995, was $114
million, or 1.4% of sales, as compared to $116 million, or 1.5% of sales, for
the same period in the prior year.
Equity in Net Income of Unconsolidated Companies
Equity in net income of unconsolidated companies for the 13 weeks
ended July 26, 1995 was $15 million as compared to $20 million for the same
period in the prior year and includes equity income related to The Sports
Authority and Meldisco.
Income Tax Provision (Credit)
Income tax provision for the 13 weeks ended July 26, 1995, was $10
million with an effective tax rate of 32.4% as compared to $43 million with an
effective tax rate of 32.1% in the same period of 1994 due to the low level of
taxable income in 1994 and the effect of restatements for discontinued
operations.
Discontinued Operations
Net loss from the disposal of discontinued operations for the 13 weeks
ended July 26, 1995, was $77 million as compared to net income from
discontinued operations of $4 million for the same period in the prior year.
Discontinued operations for the 13 weeks ended July 26, 1995 reflected the net
effect of the sale of stock in Borders Group and OfficeMax.
Net Income (Loss)
As the result of the combination of the foregoing factors, primarily
the loss from discontinued operations and reduced gross margin, the net loss
for the 13 weeks ended July 26, 1995 was $54 million, or (0.6)% of sales, as
compared to net income of $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 RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
FOR THE 26 WEEKS ENDED JULY 26, 1995
RESULTS OF OPERATIONS
Store Activity
The Company's store activity for the 26 weeks ended July 26, 1995 is summarized
as follows:
<TABLE>
<CAPTION>
YEAR TO DATE
ACTIVITY
JANUARY 25, ------------------ JULY 26, JULY 27,
General Merchandise 1995 OPENED CLOSED 1995 1994
------------------- ----------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,316 33 (117) 2,232 2,326
Canada 128 -- (3) 125 125
Czech Republic and Slovakia 13 -- -- 13 13
Mexico 2 2 -- 4 2
Singapore 2 -- -- 2 1
Other 20 -- (18) 2 21
------ --- ---- ----- -----
Total General Merchandise 2,481 35 (138) 2,378 2,488
Builders Square 166 9 (3) 172 181
------ --- ---- ----- -----
TOTAL STORES 2,647 44 (141) 2,550 2,669
===== === ==== ===== =====
</TABLE>
In addition to the store activity noted above, during the 26 weeks
ended July 26, 1995, U.S. Kmart completed five expansions and three
refurbishments as compared to eleven expansions and three refurbishments during
the 1994 period.
In June 1995, the Company announced the closing of 72 U.S. Kmart
stores which do not meet the Company's sales, profit and return on investment
requirements. The stores began closing in late August. All 72 stores are
expected to be closed by the end of the third quarter of 1995.
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, 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
26 Weeks Ended
------------------------- % CHANGE
JULY 26, JULY 27, --------------------------------
1995 1994 ALL STORES COMPARABLE STORES
($ Millions) ---------- ---------- ---------- -----------------
General Merchandise
-------------------
<S> <C> <C> <C> <C>
United States $13,950 $12,860 8.5 6.4
International 545 485 12.4 3.7 (a)
------- --------
Total General Merchandise 14,495 13,345 8.6 6.3
Builders Square 1,388 1,510 (8.1) (6.5)
------- --------
Consolidated Sales $15,883 $14,855 6.9 5.1
======= =======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
Sales for the 26 weeks ended July 26, 1995, were $15,883 million, a
6.9% increase over sales of $14,855 million in the same period of the prior
year. Comparable store sales increased 5.1% over the same period of the prior
year due primarily to an improved in-stock condition in general merchandise
stores. Management believes this has resulted in increased shopper frequency,
higher transaction counts, better in-stock positions and a larger average
transaction size.
Cost of Merchandise Sold, Including Buying and Occupancy Costs
Cost of merchandise sold for the 26 weeks ended July 26, 1995, was
$12,332 million as compared to $11,116 million in the same period of the prior
year. Gross margin as a percent of sales was 22.4% and 25.2% in 1995 and 1994,
respectively. This decrease, reflects, in part, a mix of both apparel and
hardline merchandise more heavily weighted toward promotional items and
lower-margined merchandise, which is a result of increased promotional programs
initiated in the third quarter of 1994. Margins were also affected by earlier
clearance of seasonal merchandise and higher shrinkage. In addition, a new
inventory accounting system providing a more precise interim calculation of the
gross margin contributed approximately 0.7%, as a percent of sales, of the
gross margin decline. 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 are anticipated to be lower than
those that would have been reported using the prior method, with an equivalent
positive effect in the fourth quarter. The impact of LIFO included in the cost
of merchandise sold reduced pretax earnings by $15 million for the 26 weeks
ended July 26, 1995 and $13 million for the comparable period of 1994.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the 26 weeks ended July 26, 1995, were $3,594
million, or 22.6% of sales, as compared to $3,506 million, or 23.6% 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.
Gain on Pension Curtailment
The net gain on the pension curtailment of $124 million for the 26
weeks ended July 26, 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 $30 million.
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
<TABLE>
<CAPTION>
Operating Income (Loss)
26 Weeks Ended
------------------------
JULY 26, JULY 27,
($ Millions) 1995 1994 % CHANGE
General Merchandise --------- ----------- ---------
-------------------
<S> <C> <C> <C>
United States $ 219 $ 335 (34.6)
International (15) 2 --
------ ------
Total General Merchandise 204 337 (39.5)
Builders Square (2) 29 --
------ ------
Total Continuing Operating Income $ 202 $ 366 (44.8)
====== ======
</TABLE>
Operating income for the 26 weeks ended July 26, 1995, was $202
million, or 1.3% of sales, as compared to $366 million, or 2.5% of sales, in
the same period in the prior year. This decrease in operating income resulted
primarily from continuing competitive pressures on gross margins and increased
shrinkage, coupled with the interim gross profit calculation change resulting
from implementation of a new inventory accounting system.
Interest Expense
Net interest expense for the 26 weeks ended July 26, 1995, was $223
million, or 1.4% of sales, as compared to $240 million, or 1.6% of sales, for
the same period in the prior year. Net interest expense on debt was down 9.7%
in the 26 weeks ended July 26, 1995, primarily a result of lower average
short-term borrowings, due to applying the proceeds from the IPO's of OfficeMax
and The Sports Authority and the sale of the Company's equity interest in Coles
Myer, and the early retirement of long-term debt, resulting from applying the
proceeds from the sale of PayLess, all partially offset by higher market
interest rates being paid by the Company on commercial paper borrowings.
Equity in Net Income of Unconsolidated Companies
Equity in net income of unconsolidated companies for the 26 weeks
ended July 26, 1995 was $19 million as compared to $26 million for the same
period of the prior year and includes equity income related to The Sports
Authority and Meldisco.
Income Tax Provision (Credit)
Income tax credit for the 26 weeks ended July 26, 1995, was $1 million
with an effective tax rate of 34.0% as compared to a provision of $47 million
with an effective tax rate of 30.7% in the same period of 1994. The change in
the effective tax rate is due to the low level of taxable income in 1995, lower
tax credits, and the effect of restatements for discontinued operations.
Discontinued Operations
The total net loss from discontinued operations for the 26 weeks ended
July 26, 1995, was $81 million, which includes $77 million related to the loss
on disposal, as compared to net income from discontinued operations of $7
million for the same period of the prior year. Discontinued operations for the
26 weeks ended July 26, 1995 reflected the net effect of the sale of interests
in Borders Group and OfficeMax.
Net Income (Loss)
As the result of the combination of the foregoing factors, primarily
the loss from discontinued operations and reduced gross margin, the net loss
for the 26 weeks ended July 26, 1995, was $82 million, or (0.5)% of sales, as
compared to net income of $112 million, or 0.8% of sales, in the same period in
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
The Company's primary sources of working capital are cash flows from
operations and borrowing through its commercial paper program. The Company had
working capital of $4,109, $3,561, $3,413 and $3,793 million at July 26, 1995,
January 25, 1995, July 27, 1994 and January 26, 1994, respectively. Working
capital ratios were 1.8 to 1.0, 1.6 to 1.0, 1.5 to 1.0 and 1.7 to 1.0 at the
same periods, respectively. The Company's working capital will fluctuate 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.
Net cash used for operating activities for the 26 weeks ended July 26,
1995 was $445 million as compared to $214 million in the same period of 1994.
The increase in cash used was primarily attributable to decreased earnings and
payment of liabilities, partially offset by a decrease in cash used for
inventories.
Merchandise inventories, which are primarily accounted for under the
LIFO method of inventory valuation, decreased 11.5% to $7,371 million at July
26, 1995 from $8,328 million at July 27, 1994. Inventories were up 1.8%
excluding the discontinued operations of OfficeMax, Borders Group and The
Sports Authority. This increase is primarily the result of a better in-stock
position at general merchandise stores.
Net cash provided by investing activities was $630 million for the 26
weeks ended July 26, 1995 which was primarily comprised of proceeds from
discontinued operations, partially offset by capital expenditures for new
stores and store modernization. Cash provided by investing activities was $35
million for the 26 weeks ended July 27, 1994, primarily comprised of proceeds
from the divestiture of PayLess, partially offset by capital expenditures for
new stores and store modernization. Both 26 week periods reflect capital
expenditures for store modernization projects completed and in progress.
Net cash used for financing activities amounted to $372 million during
the 26 weeks ended July 26, 1995 and was primarily attributable to a net
decrease in long-term debt and notes payable of $153 million and dividends paid
of $169 million. The $48 million provided by financing activities during the
26 weeks ended July 27, 1994, was primarily attributable to $320 million net
increase in long-term debt and notes payable partially offset by dividends paid
of $249 million. The decrease in net proceeds from the issuance of long-term
debt and notes payable in 1995 as compared to 1994 is primarily attributable to
lower borrowings resulting from cash proceeds received from the sale of
interests in Borders Group and OfficeMax.
In April 1995, the quarterly dividend on the Company's common stock
was reduced from 24 cents per share to 12 cents per share.
The Company believes its future working capital needs and planned
capital expenditures can be sufficiently funded from continuing operations and
external financing as necessary.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following information is furnished with respect to the Annual Meeting of
shareholders of Kmart Corporation held during May 1995:
(a) A meeting was held on May 23, 1995 and was an Annual Meeting.
(b) Not applicable.
(c)
Proposal 1
At such meeting all of the nominees for election as directors were elected
for the term of office set forth below.
The votes cast with respect to each nominee for election as a director were
as follows:
<TABLE>
<CAPTION>
Votes to
Withhold
Year When Authority
Term of Office Votes for to Vote for
Nominee Expires the Nominee the Nominee
------------------------- ---------------- ------------- --------------
<S> <C> <C> <C>
Lilyan H. Affinito 1998 383,500,129 14,918,801
Richard G. Cline 1998 387,477,021 10,941,909
Willie D. Davis 1998 383,877,648 14,541,282
Joseph P. Flannery 1998 383,906,753 14,512,177
Lawrence Perlman 1996 387,751,834 10,667,096
</TABLE>
A plurality of the votes cast were in favor of all nominees, and they were
therefore elected.
Proposal 2
The votes cast to ratify the appointment of Price Waterhouse as the
Company's independent auditors for fiscal 1995 were as follows:
<TABLE>
<S> <C>
For -- 391,145,942 shares
Against -- 4,473,665 shares
Abstain -- 2,799,323 shares
</TABLE>
A majority of the votes cast were in favor of Proposal 2 and, therefore,
the ratification of the appointment of Price Waterhouse as the Company's
independent auditors was approved.
Proposal 3
The votes on the Stockholder Proposal concerning cumulative voting, which
proposal was opposed by the Board of Directors, were as follows:
<TABLE>
<S> <C>
For -- 120,519,656 shares
Against -- 193,616,611 shares
Abstain -- 9,437,464 shares
Broker Non-Votes 74,845,199 shares
</TABLE>
A majority of the votes cast were not in favor of Proposal 3 and,
therefore, it was not passed.
15
<PAGE> 16
Proposal 4
The votes cast on the Stockholder Proposal concerning the elimination of a
classified board, which proposal was opposed by the Board of Directors,
were as follows:
<TABLE>
<S> <C>
For -- 190,622,274 shares
Against -- 124,283,187 shares
Abstain -- 8,668,263 shares
Broker Non-Votes 74,845,206 shares
</TABLE>
A majority of the votes cast were in favor of Proposal 4 and, therefore, it
was passed, but is an advisory proposal only.
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 three reports on Form 8-K filed by the
Registrant during the 13 weeks ended July 26, 1995.
The first report, dated April 27, 1995, included a press release
announcing that the Company approved a cash dividend to be paid on June
12, 1995 on the outstanding shares of common stock to stockholders
of record on May 11, 1995, in the amount of 12 cents per share. The
Company also announced that 1 cent of the dividends had been
allocated to the redemption of outstanding rights which had previously
been issued to stockholders pursuant to the Company's Shareholder Rights
Plan.
The second report, dated June 4, 1995, reported an employment agreement
entered into by the Company with Floyd Hall, who was named Chairman,
President and Chief Executive Officer.
The third report, dated June 26, 1995, included a press release
announcing the proposed underwritten public offering of 14,235,000
shares of OfficeMax stock, in which the Company, a 25 percent
shareholder of OfficeMax, would sell its 12,535,684 OfficeMax common
shares and would receive the resulting net proceeds.
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: September 8, 1995
Kmart Corporation
-------------------------------
(Registrant)
By: T. F. Murasky
-------------------------------
T. F. Murasky
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(Duly Authorized Officer,
Principal Financial and Accounting
Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 - Information on Computation of Per Share Earnings
27 - Financial Data Schedule (EDGAR filing only)
</TABLE>
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
($ Millions, except per share data) 13 Weeks Ended 26 Weeks Ended
--------------------- ---------------------
July 26, July 27, July 26, July 27,
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
I. Earnings per common and common equivalent share:
Income (loss) from continuing retail operations $ 23 $ 90 $ (1) $ 105
Less--Series C convertible preferred shares dividend declared (2) (2) (4) (5)
------ ------ ------ ------
(a) Adjusted income (loss) from continuing retail operations 21 88 (5) 100
(b) Discontinued operations, net of income taxes - 4 (4) 7
(c) Disposal of discontinued operations, net of income taxes (77) - (77) -
------ ------ ------ ------
(d) Adjusted net income (loss) $ (56) $ 92 $ (86) $ 107
====== ====== ====== ======
Weighted average common shares outstanding 459.2 410.0 458.9 409.7
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 1.9 0.3 0.6 4.1
Less--common shares assumed repurchased (1.8) (0.2) (0.5) (3.8)
------ ------ ------ ------
0.1 0.1 0.1 0.3
------ ------ ------ ------
(e) Applicable common shares, as adjusted 459.3 456.1 459.0 456.0
====== ====== ====== ======
Earnings per common and common equivalent share:
Adjusted income (loss) from continuing retail operations (a)/(e) $ 0.05 $ 0.19 $(0.01) $ 0.22
Discontinued operations, net of income taxes (b)/(e) - 0.01 (0.01) 0.02
Disposal of discontinued operations, net of income taxes (c)/(e) (0.17) - (0.17) -
------ ------ ------ ------
Net income (loss) (d)/(e) $(0.12) $ 0.20 $(0.19) $ 0.24
====== ====== ====== ======
II. Earnings per common and common equivalent share
assuming full dilution:
(f) Income (loss) from continuing retail operations $ 23 $ 90 $ (1) $ 105
(g) Discontinued operations, net of income taxes - 4 (4) 7
(h) Disposal of discontinued operations, net of income taxes (77) - (77) -
------ ------ ------ ------
(i) Net income (loss) $ (54) $ 94 $ (82) $ 112
====== ====== ====== ======
Weighted average common shares outstanding 459.2 410.0 458.9 409.7
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 8.2 9.6 8.2 9.6
Stock options--
Common shares assumed issued 2.0 0.3 1.0 4.1
Less--common shares assumed repurchased (1.6) (0.2) (0.8) (3.8)
------ ------ ------ ------
0.4 0.1 0.2 0.3
------ ------ ------ ------
(j) Applicable common shares, as adjusted 467.8 465.7 467.3 465.6
====== ====== ====== ======
Earnings per common and common equivalent share
assuming full dilution:
Income (loss) from continuing retail operations (f)/(j) $ 0.05 $ 0.19 $(0.00) $ 0.22
Discontinued operations, net of income taxes (g)/(j) - 0.01 (0.01) 0.02
Disposal of discontinued operations, net of income taxes (h)/(j) (0.17) - (0.17) -
------ ------ ------ ------
Net income (loss) (i)/(j) $(0.12) $ 0.20 $(0.18) $ 0.24
====== ====== ====== ======
(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> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JUL-26-1995
<CASH> 293
<SECURITIES> 0
<RECEIVABLES> 509
<ALLOWANCES> 0
<INVENTORY> 7,371
<CURRENT-ASSETS> 9,158
<PP&E> 11,021
<DEPRECIATION> 5,087
<TOTAL-ASSETS> 15,808
<CURRENT-LIABILITIES> 5,049
<BONDS> 1,956
<COMMON> 465
0
131
<OTHER-SE> 5,250
<TOTAL-LIABILITY-AND-EQUITY> 15,808
<SALES> 15,883
<TOTAL-REVENUES> 16,004
<CGS> 12,332
<TOTAL-COSTS> 12,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223
<INCOME-PRETAX> (2)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (1)
<DISCONTINUED> (81)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.18)
</TABLE>
