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S&P Downgrades Kmart Credit Rating

January 14, 2002

DETROIT (AP) _ Standard & Poor’s, one of the nation’s biggest debt rating agencies, lowered its credit rating for Kmart Corp. and said it was reviewing the retailer’s financial situation to see if further cuts are warranted.

S&P officials said the actions are based on heightened concerns about Kmart’s loss of financial flexibility in recent weeks. Kmart is the nation’s third-largest discount retailer after Wal-Mart Stores Inc. and Target Corp.

The Troy-based retailer’s stock price has tumbled since the beginning of the year. It dipped as low as $2.55 Monday morning, but by the close of trading had rebounded to $2.84 a share, down 14 percent since Friday and below its previous 52-week low of $2.99.

S&P downgraded Kmart’s corporate credit rating from a BB to a B- and its preferred stock rating from a B to a CCC-. It also said the retailer was on its list of companies to watch with negative implications.

On Friday, Moody’s Investors Service, the other major credit ratings service, lowered Kmart’s debt two notches, citing the company’s poor sales and doubts about its recent turnaround efforts.

Messages left Monday with Kmart officials were not immediately returned.

Michael Bernacchi, a professor of marketing at the University of Detroit Mercy, said Kmart needs something extraordinary to pull it out of its ``downward spiral.″

Bernacchi said the retailer’s No. 1 problem is that it’s failed to market itself as something positive to the average consumer and it’s seen as a ``joke stock″ by analysts and investors.

``Their image has been demolished by Wall Street and by main street,″ Bernacchi said.

He said the company suffers because it isn’t seen as a deep discounter such as No. 1 Wal-Mart, and it doesn’t have the upscale touch that the Minneapolis-based Target portrays.

``If competitors weren’t carnivores before, Kmart is definitely their meat now,″ Bernacchi said.

Jeff Stinson, a research analyst with Midwest Research in Cleveland, said investors need to see a return to profitability and stability within the company before the stock price will rise.

``Right now the stock price is a result of fears that Chapter 11 (bankruptcy) is right around the corner,″ he said.

Under Chairman and CEO Chuck Conaway, the company has attempted to gain positive name recognition by signing on brands such as Martha Stewart, Disney and Sesame Street.

The Martha Stewart Everyday brand, which covers such products as sheets, towels, paints and kitchenware, is Kmart’s largest volume-producing label, generating about $1 billion in sales last year.

An old standby _ the Blue Light Special _ returned to Kmart in April 2001. The marketing tool, first introduced in 1965 and retired in the 1990s, offers customers lowered everyday prices on more than 30,000 items.

Kmart officials announced Thursday that the company would not meet Wall Street’s consensus expectation for earnings of 1 cent a share for fiscal 2001, and suggested it may seek additional financing.

The holiday shopping period didn’t help Kmart rebound. The company said that for the five-week period ended Jan. 2 _ the close of its fiscal year _ net sales slipped 1 percent on a same-store basis from the previous year.

Total net sales for the period were $5.52 billion, down slightly from $5.54 billion for the same period last year, Kmart said.

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On the Net:

Kmart Corp.: http://www.bluelight.com/

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