MOODY'S LOWERS SECURITIES RATINGS OF KMART CORP(SR. to Baa1)
New York, 01-27-95 -- Moody's Investors Service lowered the long-term ratings of Kmart Corporation. The rating action is based on further deterioration in operating performance and the remote outlook for rapid recovery.
Ratings lowered are:
Kmart Corporation -- senior unsecured debt and medium-term notes to Baa1 from A3, industrial development bonds to Baa1 from A3, industrial development bonds to Baa2 from Baa1, lease certificates to Baa2 from Baa1, 415 shelf registration to (P)Baa1 from (P)A3, preferred stock to "Baa2" from "a3."
Ratings not affected by this action:
Kmart Corporation -- rating for commercial paper at Prime-2.
Kmart Canada Limited -- rating for commercial paper at Prime-2.
During the last few years, despite renovating two-thirds of its stores, Kmart has been unable to boost sales growth or stop the deterioration in operating earnings in its core discount stores. Although this has in part resulted from continuing challenging competition, a significant portion has also resulted from Kmart's own culture and internal difficulties including merchandising and inventory management problems. In addition, despite its large size, Kmart lacks a cost advantage vis-a-vis regional chains and operates at a cost disadvantage to Wal-Mart. Moody's is also concerned that, although Kmart's decision to slow capital spending will reduce cash flow demands, it may leave the company with a less competitive store base, as competitors such as Wal-Mart and Target, continue to more rapidly upgrade and expand their respective store chains.
Despite these problems, Moody's believes that with some earnings improvement, Kmart can become cash self-sufficient, if it effectively manages capital expenditure and dividend levels in line with expected performance. During the last few months, substantial change has begun at Kmart. Senior management changes have been made, costs have been cut, personnel levels have been reduced, further cost cuts have been identified, and merchandising and distribution strategies have begun to be thoroughly reviewed. However, improvements in long-term financial performance will require further tough decisions, if Kmart is to achieve stronger revenue growth in existing stores and a much lower cost structure. Moody's believes that Kmart's culture is changing and it has begun to put the basic building blocks in place to achieve this improved financial performance. However, Moody's will continue to monitor Kmart's development and execution of merchandising strategies, cost cutting achievements, and capital reinvestment policies.
Kmart Corporation, one of the largest retailers in the United States, is headquartered in Troy, Michigan.
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