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Bluelight.com Faces Uncertain Future

Bargain shoppers who want to visit BlueLlight.com, Kmart's (NYSE:KM) e-commerce portal and Internet service provider (ISP), can do so but for how long?

The company that for decades made the "blue light specials" its motto for thrifty shoppers around the U.S. filed for Chapter 11 bankruptcy protection Tuesday and executives promised the reorganization would "aggressively address financial and operational challenges." In other words, it's most likely going to look for store closures and staff cuts.

Charles C. Conaway, Kmart chief executive officer, said tough changes are a necessary part of its restructuring program.

"We are committed and determined to complete our reorganization as quickly and as smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," he said. "We deeply regret any adverse effect today's action will have on our associates, vendors and business partners. But after considering a wide range of alternatives, it became clear that this course of action was the only way to truly resolve the company's most challenging problems."

Kmart filed for bankruptcy protection in the Chicago U.S. Bankruptcy court and expects to emerge from Chapter 11 in 2003. Executives secured $2 billion in debtor-in-possession financing from J.P. Morgan Securities, Inc., and Fleet Securities, Inc. and vendor liens to carry the company through the reorganization process.

The cash and vendor leins make a Kmart shutdown nearly impossible. That, and the fact officials are now free from leasing requirements on 350 of its 2,100 stores nationwide, saves $250 million right off the bat.

Todd Smith, a channels analyst with ARS, Inc., feels Kmart's online success will likely hinge on keeping itself differentiated from other competitors like WalMart.com and Target.com, namely its lucrative deal with the Martha Stewart line of products.

Bluelight.com, based out of San Fransisco, didn't fare well during the holiday 2001 shopping season online, compared to its competition, despite beating growth predictions.

CARMA imMEDIAte.com, a watchdog group that analyzes media coverage of the largest companies around the world, found Kmart had a tough time competing with WalMart's lower prices and Target's more-fashionable products, and received the most unfavorable ratings.

While Smith concurs with the assessment, saying most Target shoppers (known for their chic-y clothes demands) wouldn't be caught dead in a Kmart store, he thinks Kmart's reduced store presence nationwide means increased reliance on its online presence.

"With Kmart closing all of these stores, they're going to have to rely on their Web presence more heavily than they anticipated, now that they'll lose a lot of their reach," Smith said. "The thing that scares me is with the creditors now with the suppliers - the Martha Stewart collection and all those items and products that differentiated Kmart from WalMart and Target - if they do lose those brands that separate themselves, that could create a lot of problems (for Kmart)."

That's not good news for Kmart's online venture, an operation that's been a mixed blessing for the nominally bricks-and-mortar enterprise.

H. Jason Gold, managing principal of Gold Morrison & Laughlin PC, a Tysons Corner, VA-based bankruptcy, restructure and insolvency law firm, said items like store closures and jobs cuts will happen soon. Web ventures, he said, will likely go first.

"Cutting-edge technologies like Web sites and various ventures that (Kmart) has entered into are going to wind up on the cutting room floor," he said. "They have to cut costs in Chapter 11 - that's a mandate - and while we don't know that they will do anything specific with these ventures, I think it's safe to assume that these types of ventures be looked at very carefully."

BlueLight.com as a recognizable commodity got its start Dec. 4, 2000, with Kmart's acquisition of free ISP Spinway (a now- defunct free ISP), immediately giving the store a nationwide audience of bargain-seekers.

At first Kmart pretended to be an outside agency of BlueLight.com, giving the fledgling company free rein to make its own history. After all, the company was supposed to be a three-way venture of Kmart, Spinway (now out of the picture) and Yahoo! (NASDAQ:YHOO). Of course, Kmart was the major investor, funding nearly all of BlueLight.com's second-rounding financing.

Before long, however, lagging sales and the ongoing costs associated with operating a nationwide ISP forced the company bring into Kmart's corporate wing. First cutting 38 employees and Bluelight.com's chief executive officer to try to bring costs in line, Kmart later decided to get it over with and acquired the company in July 2001.

Dave Karracker, a BlueLight.com spokesperson, said Kmart's bankruptcy problems wouldn't affect key operations of the online venture.

"Kmart (executives) say we are a very critical element in their retail strategy, not just now but going forward, so we don't forsee any changes in the basic business operations" he said. "Since Kmart took over, we've reduced our ecommerce spending by nearly 75 percent and they were very happy with our online revenues during the holidays, which exceeded the 10-20 percent growth analysts were predicting."

Karracker added the ISP business will not change, and current customers shouldn't expect a lapse in service in that area or in their online shopping.