Faces Uncertain Future

Bargain shoppers who want to visit, 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 and, namely its lucrative deal
with the Martha Stewart line of products., 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, 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.” 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, 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’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’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 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.

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