---------- Kmart sinks to another 52-week low Downgrade continues to drag the stock lower By Carolyn Pritchard, CBS MarketWatch.com Last Update: 10:37 AM ET Jan. 3, 2002
TROY, Mich. (CBS.MW) -- Shares of struggling discount retailer Kmart continued to fall Thursday morning, extending their losses on the heels of Wednesday's rating downgrade by Prudential Securities.
Kmart's (KM: news, chart, profile) stock fell as much as 18 percent, or 98 cents, to a low of $4.48 in Wednesday's session, then retraced slightly to close at $4.74. More than 23.6 million shares changed hands on the session, making it the second most active issue on the New York Stock Exchange.
On a split-adjusted basis, it was the stock's lowest level since January 1983.
Kmart shares hit a 52-week high of $13.55 in early August.
Thursday, the stock continued to fall, hitting $4.45.
The downgrade
Prudential analyst Wayne Hood downgraded shares of the world's second-largest discount retailer to a "sell" from a "hold" and said he wouldn't rule out the possibility of a Chapter 11 bankruptcy filing.
Prudential also lowered its earnings estimate on the shares after Kmart adjusted its December sales forecast to below plan.
Kmart said in a recorded message Monday that although sales in the week ended Dec. 26 came in above target, it expected same-store sales for the full month to be below its original forecast of between flat results and a 2 percent rise from a year ago.
For November, Kmart's comparable same-store sales fell 2.6 percent, with total sales falling 1.9 percent from the year before.
Prudential cut its earnings estimate for the fourth quarter of 2001 to 20 cents per share from 43 cents. The firm is now looking for a loss of 12 cents per share for the full fiscal year ending Jan. 31, compared with its previous forecast for a profit of 15 cents per share.
For all of 2002, Prudential now expects Kmart to register a profit of 25 cents per share, compared with previous expectations of a 35-cent-per-share profit.
If Kmart turns in less in the way of earnings, said Prudential, this will place additional pressure on cash flow for 2001 and 2002, and the two, said the firm, jeopardize Kmart's ability to fund its supercenter conversions.
Prudential said it doesn't believe that a Chapter 11 bankruptcy filing from Kmart is imminent, but if the first half of 2002 is disappointing, "we wouldn't rule it out."
Company gives its side
In response to the downgrade, Kmart spokesman Jack Ferry said that the retailer has sufficient funds and lines of credit to continue to carry out its strategies. To back up his point, he pointed to a recent report issued by debt-rating agency Moody's Investors Service.
"It is important to note," said Ferry, "that in its mid-December report, Moody's said that it was comfortable with Kmart's liquidity position."
On Dec. 14, Moody's downgraded Kmart's credit status to "junk" and said that it could be "some time" before the nation's second-largest retailer recovers.
"In addition to recent downgrades on debt issues, the most recent comment from Prudential Securities makes it more difficult for Kmart to obtain competitive pricing in capital markets," wrote Richard Hastings, vice-president, credit economist and retail sector analyst with Cyber Business Credit LLC, in a research note late Wednesday afternoon.
"As pricing for capital market sources of liquidity continues to increase, Kmart will rely more than ever upon unsecured supplier credit as the most important source of liquidity."
Without a sustained period of capital spending, said the firm, Kmart will not achieve competitive improvements.
The discounter has been struggling to turn itself around this year, initiating a sweeping restructuring that included cutting 25 percent of its suppliers and setting a goal in which vendors will finance 40 percent of Kmart's inventory position.
For the third quarter ended Oct. 31, Kmart reported a net loss of $224 million, or 45 cents per share. That compared with a net loss of $67 million, or 14 cents per share, registered in the same period the year before.
Prudential's Hood did not return calls seeking additional comment.
Carolyn Pritchard is a reporter for CBS.MarketWatch.com in San Francisco.
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