- The Washington Times - Thursday, January 3, 2002

DETROIT (AP) Shares of Kmart Corp. fell 72 cents yesterday to close at $4.74 after an analyst downgraded the stock, citing disappointing fourth-quarter sales and earnings and a "precarious" cash position.

Prudential Securities Inc. said it would not be surprised if Troy, Mich.-based Kmart filed for Chapter 11 bankruptcy "if trends do not improve" in the next six months. The financial organization downgraded the discount retailer's stock from "hold" to "sell."

While bankruptcy is not imminent for Kmart, it is a consideration if the retailer's performance does not improve by the second half of the year, Prudential said in a research report released yesterday.

"Fourth-quarter sales and earnings have been disappointing, and our concerns about cash flow have been heightened," the report said.

A Kmart spokesman said Prudential's concerns are unfounded.

"Kmart has sufficient funds and available lines of credit to continue to carry out our strategies," Kmart spokesman Jack Ferry said.

"Kmart is implementing a major corporate revitalization strategy that includes massive cultural and operational changes" that already are showing results, he said.

Still, Prudential is not the only financial institution to question Kmart's ability to fend off more vibrant competitors like Wal-Mart Stores Inc. and Target Corp.

"Kmart just seems to be the third choice for consumers behind Wal-Mart and Target because they have cleaner stores, they're more modern, even better parking lots," said David Sowerby, portfolio manager for Bloomfield Hills, Mich.-based Loomis Sayles Inc.

From December 1991 to December 2001, Target's stock price increased 696 percent, Wal-Mart's rose 291 percent, but Kmart's dropped 77 percent, Mr. Sowerby noted.

Kmart said in a recorded message that sales from Dec. 20 to Dec. 26 were "above plan," with high-ticket items, such as television sets and video-game consoles, leading the way.

For the month of December, though, the retailer said its sales were below expectations; the company had anticipated results for the month to be flat or to increase by 2 percent. The company will release complete sales results for the month on Jan. 10.

Prudential lowered its estimate for Kmart's fourth-quarter earnings from 43 cents a share to 20 cents, and a loss of 12 cents a share for the full year compared with its previous estimate of 15 cents. Its estimate the next 12 months also was reduced to 25 cents a share from 35 cents.

A consensus of analysts surveyed by First Call/Thomson Financial expects the company to earn 39 cents for the fourth quarter ended Dec. 31 and 10 cents for the full year.

In November, Kmart announced a third-quarter loss of $224 million, or 45 cents per share. Excluding a hefty restructuring charge, the nation's No. 3 retailer lost $127 million, or 25 cents per share, in the quarter.

The results beat Wall Street expectations, but in December, Moody's Investment Service downgraded Kmart's debt rating to junk status.

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