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KMART CORPORATION COMPANY FORECAST

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Page 1: KMART CORPORATION

KMART CORPORATION

COMPANY FORECAST

FIN 6425April 1, 2000

Debbie HilderbrandtJoyce Hinrichs

Page 2: KMART CORPORATION

David Holton

Index

Note: All dollar values used in this analysis in relation to the financial statements are in

millions unless otherwise noted.

Section Pages

Company Forecast 1-20

Appendix 1 21 Excell Spreadsheet

Table 1 – Income Statement 1

Table 2 - Balance Sheet 2

Table 3 – Cash Flow Statement 3

Table 4 – Common-size Income Statement 4

Table 5 – Common-size Balance Sheet 5

Table 6 – Financial Ratios 6

Table 7 – Other Key Ratios 7

Appendix 2 29

Cost of Capital

Documentation for Cost of Capital

Bibliography 30

Page 3: KMART CORPORATION

INTRODUCTION

Industry Forecast

The discount retail industry will continue to yield fearless competition. The

major players in the industry, Wal-Mart, Target and Kmart continue to jockey for

position and ranking by attempting to differentiate themselves to the American consumer.

Lower costs and a higher quality of customer service remain as the consumer's preference

in the discount retail industry. Wal-Mart continues its attempt to control the market with

low prices and broad assortments while Target plans to trend toward a more modern,

fashion based agenda. Kmart is forming strategic alliances with celebrities and is now a

member of the e-commerce world. The most successful players will be those who

continue expansion while reinvesting earnings with a continued emphasis in the Internet.

Constant evaluation and re-evaluation is needed to strengthen ones position. Product mix

remains crucial always adapting to the more trendy generations to come. Merchandising

and distribution will be paramount, thus supply chain management a key to success

(Profile-Kmart, 2000).

Expansion and technology will continue to require large allocations of funds.

Growth spawns success and the current and continuing trend is to provide the customer

with a luxurious, virtual shopping experience. The more appealing the presentation to the

customer; the better retention of the customer and the reduced threat from competition.

This evolution is costly, but increases customer retention. Target continues to lead the

pack with a trendier store design and product line. Technology, primarily speaking the

Internet, has the full attention of the discount retail industry. The most recent entry into

this sector of the business is Kmart with the development of BlueLight.com. This web

Page 4: KMART CORPORATION

site provides Kmart with the needed e-commerce ability enjoyed already by some of its

competitors. BlueLight.com still has only a fraction of the number of items that are

available in Kmart's stores, while Wal-Mart's online selection is quickly surpassing its

typical store inventory (Company, 2000).

Kmart Forecast

Kmart’s merchandising strategies emphasize popular national brands as well as

exclusive private label brands at competitive prices. The key merchandising initiatives to

drive the strategy include developing strong and prominent private label brands,

increasing the mix of high frequency items, providing a better merchandise assortment

and ensuring competitive prices. Strategic vendor alliances with some of the nation’s

strongest, most popular brands will enable Kmart to expand its merchandise assortment

and offer customers better value. Kmart plans to offer an increased mix of frequently

purchased basic and consumable items in the “Pantry” area of their Big Kmart stores.

This increased mix of high frequency items will drive traffic into stores while

providing customers with all of their basic needs in a convenient and easy-to-shop

format. The Kmart Pantry will become one of the company’s power-departments by

directly fitting customers' lifestyles. Kmart’s merchandise initiatives are developed with

the hope that customers will visit more frequently. Specifically, Kmart is seeking to

provide better value through more attractive merchandise assortments in both price and

quality (Company, 2000).

Improved execution of pricing strategies will be critical to Kmart’s long-term

success. Kmart’s competitive pricing policy positions the company within three percent

Page 5: KMART CORPORATION

of the competition on image items, within five percent on all other products, and

guarantees the lowest sale prices every time.

Internet Access

Welcome to e-commerce. For Kmart the future looks a little brighter as

BlueLight.com, partners with Yahoo!, replacing Kmart.com as Kmart's exclusive retail

outlet on the Web. This aggressive move is an attempt to move away from the original

web site, which offered a more informative view of Kmart from company history to

financial information. From the convenience of a customer’s PC the customer will get

the low prices and wide selection that Kmart has always offered, but purchasing is

accomplished without leaving their chair. Once signed up for the totally free Internet

service, you'll get unlimited use of the entire Internet, plus Yahoo!'s full suite of online

tools and services. This is a bold move by Kmart in an attempt to take the lead in the

discount retail industry. The goal of Kmart is to "increase available online inventory"

(Attention, 2000).

Stock Purchasing

Attention, Kmart shoppers! Here's the latest blue-light special: Company stock at

just half the price of a year ago. The country's second-largest retailer has teamed with the

online investing firm StockPower to sell Kmart common stock through the Web site of its

recently started e-commerce company, BlueLight.com. This move provides further

evidence that online investing is moving from cutting edge to commonplace. Again,

Kmart is offering a futuristic and forward thinking approach to establish itself as a leader.

Kmart forecasts that a growing percentage of its 180 million customers will turn into

shareholders, which should increase their spending and loyalty. Kmart feels this move

Page 6: KMART CORPORATION

will improve the stock performance, which has languished as the company's in-store sales

stagnated and margins shrunk because of aggressive competition. A.G. Edwards rates

Kmart stock a hold, and has not done any underwriting of stock or debt for the company.

Still, for those individuals bent on placing their focus away from high-flying technology

stocks and toward the slower-growth world of retailing, Kmart's online ordering system

can be set up to allow for automatic monthly stock purchases and will email all investor

relations materials (Kmart Launches, 2000).

Culture Changes

Kmart has been implementing dramatic changes in their restructuring plan. The

new “Big Kmart” is a dramatically redesigned, customer-friendly and exciting store.

Kmart feels customers will find Big Kmart stores more spacious, brighter and better

organized with a bigger assortment of popular and trendy merchandise. Super Kmart

Centers are the ultimate shopping experience, combining the convenience of a full-

service grocery store with a typical Kmart prototype under the same roof.

Kmart is becoming much more proactive in its training of employees. A great

deal of importance has been placed on training and development. From in-store, on-the-

job training, to it's comprehensive management development programs and Kmart

University. Kmart is starting to commit to helping its employees develop the skills

needed to succeed in its retail and corporate environments. They have been more

actively promoting from within, and providing the tools and programs to make sure the

employees are ready for each step along the way (Company, 2000).

Page 7: KMART CORPORATION

Key Resignations and Retirement

Kmart announced that it's Executive Vice President and General Counsel,

Anthony N. Palizzi, 57, would retire in early 2000 after 28 years of service with the

retailer. As General Counsel since 1991, Mr. Palizzi had been responsible for all legal

matters of the company as well as Kmart’s Corporate Affairs department. Mr. Palizzi

intends to pursue other business interests, including serving on boards of other

companies. Mr. Palizzi has made many contributions to Kmart during his career,

including service as President during a difficult period of restructuring in early 1995. The

sudden nature of the retirement leaves it unclear as to whether the retirement was Mr.

Palizzi's idea or Kmart's (Kmart…retirement, 2000).

On January 14, 2000 Kmart Corporation announced that Peter J. Palmer, 59,

Vice President, Labor Relations and Assistant General Counsel, will retire with 29 years

of service, effective Feb. 1, 2000. With Mr. Palmer’s retirement, the company will

restructure his previous responsibilities, moving certain functions from the legal

department to other areas of the business. Under the new structure, Kmart Vice President

and Treasurer Michael J. Viola, will be responsible for Kmart’s legal department, along

with matters related to corporate governance, commercial law, trade regulation and

Kmart Properties, Inc. Kmart is searching for a new General Counsel following the

retirement of Tony Palizzi, announced earlier this week. Again, it is unclear by the

retirement as to whose idea it was (Kmart…executive, 2000).

Future focus

Kmart’s focus during 1999 will be to complete the conversion of existing stores

into the Big-K format where most beneficial. They are projecting to complete all but 200

Page 8: KMART CORPORATION

store conversions. They are also expecting continued strong single digit sales growth due

to the new format and their entrance into the Internet arena. Cost of sales is projected to

remain above the industry standard of 35% due to the sales growth, conversion to the new

format and Internet sales. With continued leverage of SG&A expenses operating margins

are expected to gradually improve and move towards the industry standard of 26.90%.

Due to the fact Kmart is currently operating at an 18.55% margin as of FYE98 a

movement toward the 26.90% will be gradual. In order for Kmart to significantly

improve this margin, control of cost of sales will need to be reviewed. Earnings before

taxes therefore will also gradually improve due to the absence of voluntary early

retirement program expense during 1999-2001.

The balance sheet is expected to reflect a decrease in liquidity attributed to the

repurchase of common shares and investment in the new store format. With the additional

funding acquired through a revolving credit agreement, Kmart decreasing liquidity

should not be an issue for 1999-2001. In addition, long-term debt is not expected to

increase past 1999 due to the completion of the conversion of all stores. By retaining

profits in the company, equity will increase 7% above the industry standard of 48%.

Kmart’s projections for 1999-2000 reflect the majority of these assumptions from Kmart

and Valueline analysts. In addition, assumptions were derived from the forecast for the

retail industry and research completed on the company.

Income Statement

Sales Growth

Kmart’s conversion to the Big K format appears to be successful, therefore,

Kmart should continue to experience moderate sales growth. The future of Kmart’s

Page 9: KMART CORPORATION

success in the investment of BlueLight.com, which provides free Internet access and

online offering of services and merchandise is unknown.

Projected sales growth of 6.5% for 1999 following the overall three year sales

growth of 7.1% and 15 consecutive quarters of overall growth in the company. In

addition, the 6.5% is a conservative estimate attributed to the tightening of monetary

policy in the economy. This tightening of policy will effect the retail industry in the 4 th

quarter as consumers tighten their wallets and find it less appealing to acquire additional

consumer debt due to increasing interest rates.

The 6.5% growth rate reflects a 2% increase over 1998, which will be adjusted for

projected GDP growth rate for years 2000 and 2001. GDP is expected to decline to 4.63

to2.6 for third and fourth quarters for year ending 2000. Although GDP is expected to

decline, sales will continue increase at a rate of 1% primarily due to the Internet sales on

Bluelight.com at rates of 7.5% and 8.5% for years ending 2000 and 2001.

Costs of Goods Sold

Costs of Good Sold rose at the same rate as sales growth in 1999, 2000 and 2001

following the historical trends of growth rate comparable to sales growth of 7% for years

ending 1996-1998. In addition, inventory is also on the rise to support additional sales as

well as their Internet investment, BlueLight.com. With Cost of Goods Sold increasing at

the same rate of sales, the common size remains the same for years 1999-2001. Kmart’s

Cost of Goods Sold is greater than the industry average because Kmart has closed stores

that resulted in an inventory build-up. In addition, Kmart’s entrance into the online

Internet Sales will require additional new inventories.

Page 10: KMART CORPORATION

Per ValueLine, Kmart is partnering with Yahoo and has taken a 60% interest in

offering free Internet access via BlueLight.com. Kmart will begin advertising

BlueLight.com within the next six months. Online revenues will be primarily generated

from Internet sales and advertising fees. Due to the high costs associated with supporting

BlueLight.com, Kmart is not expected to be able to decrease costs of goods sold to

industry norms. This higher cost of goods sold will continue to drain on operating and

net profit margins. Kmart is expected to spin-off BlueLight.com in 18-24 months that

could result in a large increase in earnings for that year due to the sale. However, this

spin-off possibility was not taken into consideration in these projections because it is pure

speculation as to the strategic plans of Kmart in regards to BlueLight.com

In comparison to the industry, cost of goods sold will remain above the average

norm. Kmart will also be limited on price increases to offset the higher cost of goods sold

due to the competitive market with the discount retail giants of Walmart and Target.

Furthermore with the online sales which require larger inventory it is unrealistic to

decrease costs of goods sold with the continued sales growth. However, it is noted, that

the management of Kmart will need to focus on decreasing their costs of goods sold to

continue to improve their operating margin in comparison to the industry norm.

For years ending 2000 and 2001, cost of goods sold has the potential of rising

even higher due to tightening of monetary policy and rising fuel costs. The increase in

fuel costs will affect every industry in 2000 and possible into 2001 with increasing

manufacturing and distribution costs. This potential increase is COGS will be difficult to

pass on to the consumer due to competition resulting in the inability to pass the costs to

Page 11: KMART CORPORATION

the consumer. Additional increase in COGS was not factored in due to the already

above industry norm totals and the expected costs should be marginal.

SG&A

As stated above, Kmart’s management has successfully controlled the companies

SG&A expenses effectively to improve their margins. It is projected that Kmart will

continue to leverage SG&A expenses at a marginal growth rate of 6.25%, 7.25% and

8.5% for 1999. By 2001, Kmart will be reaching a point of exhaustion in squeezing

SG&A expenses. Therefore, in 2001, the growth rate will be the same as sales of 8.5%

Overall, the projected SG&A will remain stable for projections 1999-2000 as a

percentage of total sales following the historical trend 1996-1998 as seen in the common

sized income statement.

These projected rates results in slightly improved operating margins for Kmart

growing at a slow but consistent increased rate of 3.36%, 3.39% and 3.36% for years

1999-2001 respectively over the 1998 operating margin of 3.30%

Interest Expense

Interest expense will continue at a rate of 10% of total debt. This 10% represents

the average interest rate on all debt.

Income Taxes

The historical income tax rate has been approximately 30%. Therefore, a 30%

income tax rate is projected for 1999-2000.

Page 12: KMART CORPORATION

Income from continuing operations

These projections result in a consistent improved income from continuing

operations before extraordinary items of 1.80%, 1.92% and 1.96%. For years 1999 and

2000, it is projected that Kmart will complete the divestiture of discontinued operations.

The company will still report a loss on discontinued operations, which will effect their

bottom line net income figure of approximately $175 net of taxes for 1999, however, will

decrease to $70 net of taxes for 2000. By 2001, Kmart should not experience any other

extraordinary losses from discontinued operations resulting in the 1.96% margin.

Balance Sheet

Assets

Cash and Cash equivalents

Cash and cash equivalents have increased at a nominal rate of 64% over the three

year period 1999-2001. However when reviewing the common size percentages of

3.96%, 4.43% and 5.96%, Kmart is gradually moving towards the industry standard of

14.30%. The improvement of cash is attributed to inventory control resulting in

decreased INVDOH and extending APDOH. Kmart remains below the industry average,

however, they are able to operate with positive cash flow due to the marginal changes in

the accounts listed above as well the acquired $40.6 million revolving credit agreement.

Inventories

Although it appears that Kmart may have inventory management problems due to

holding inventories more than 28% above industry norm. INVDOH is approximately

90.64 versus the industry norm of 73 days for year ended 1998. Inventory is projected to

Page 13: KMART CORPORATION

remain at 47% of total assets for 1999-2001 respectively. This assumption is due to the

continued opening of the Big-K format stores and the new Internet service that will also

require additional inventory build-up. Furthermore, with the closing of stores Kmart will

be able to decrease their inventories from retaining that excess inventory. Consequently,

INVDOH will begin trending towards the industry norm of 73 days with maintaining

inventory levels of 47% of total assets.

Other Current Assets

The Kmart financial statements did not provide specific information in regards to

the Other Current Asset account. Therefore, it is projected this account will remain stable

at $584 years ending 1999-2001.

Property Plant and Equipment

Property plant and equipment net change between 1997 and 1998 was 8%. It is

projected that PP&E will increase at 6.5% rate for 1999, which is the same growth rate as

sales due to the additional investment required in refrigeration systems and equipment for

the Big-K format stores that have grocery store items. By 2000, it is expected that Kmart

will have the majority of all stores open, therefore, PP&E should begin to increase at a

slower rate of 4% and 3% for years ending 2000 and 2001 respectively.

This slower growth is estimated at one half of the projected growth in 1999. In

addition, the growth in Property Plan and Equipment for the three years period was

approximately 4%. This rate is comparable because Kmart was not closing as many

stores during 1996-1998 as they are projected to in 1999. The 3% represents and

additional 1% decline attributed again to the absence of store closings for 2001.

Property Held for Sale

Page 14: KMART CORPORATION

Property held for sale remained at zero for 1997 and 1998. Therefore, it is

projected that this account will remain at zero. The majority of stores opening as the Big-

K format are remodeled existing properties. Consequently, Kmart would not have any

properties for sales. In addition, Kmart leases 95% of all stores and owns only 5%;

therefore, the likelihood of closing a store that Kmart owns is unlikely also supporting the

absence of property held for sale.

Other Assets and Deferred Charges

Kmart financial statements did not provide any specific information in regards to

the Other Assets and Deferred Charges account. Therefore, it is projected this account

will remain stable at $422 for years ending 1999-2001.

Liabilities

Current Maturities of Long-Term Debt

Kmart’s 1998 Audited Financial Statements stated the current maturities of long

term debt for 1999-2001. These amounts are $66, $66 and $68 for 1999-2001,

respectively.

Trade Accounts Payable

Kmart’s Trade accounts payable increase at approximately 6.5% between 1998

and 1997. Consequently, Kmart is giving up approximately $292 million dollars by

paying trades 4.21 days quicker in based on average daily cost of goods sold. However,

trade accounts payable were set at the accounts payable days on hand (APDOH) of 30

days for 1999-2001 versus the average APDOH of 28.79 days for years ending 1996-

1998 for a slowly trend towards the industry average of 33 days. Therefore, trade

Page 15: KMART CORPORATION

accounts payable grew at a rate of 7.5%, 7.5% and 8.5% for years ending 1999-2001

respectively.

Accrued Payroll and Other Liabilities

Kmart financial statements did not provide any specific information in regards to

the Accrued Payroll and Other Liabilities. Therefore, it is projected this account increase

at a rate of 5% matching the overall change of 4.7% between 1996-1998.

Taxes Other Than Income Taxes

Kmart financial statements did not provide any specific information in regards to

the Other Assets and Deferred Charges account. In addition, there was minimal change

of .48% between 1997 and 1998. Therefore, it is projected this account will remain

stable at $208 for years ending 1999-2001.

Long-Term Debt and Notes Payable

Historically Kmart has focused on decreasing the long-term debt by

approximately 28% for the three year period 1996-1998 by paying down the debt with

cash. This management decision was to move towards the total debt industry standard of

12.9.

It is projected for 1999; long-term debt will increase by 6.5% due to the additional

increase in property plant and equipment due to the refrigeration systems and equipment

needed for the Big-K stores. By 2000, this conversion should be completed, therefore,

long-term debt should remain stable less the current maturities on long-term debt. In

Page 16: KMART CORPORATION

addition, Kmart has entered into a $40.6 million revolving credit agreement to finance

operations on a short-term basis. Once all stores are in place, this debt may be

restructured to appropriately match financing of long-term assets with long-term debt.

However, the financial statements or press releases did not indicate this assumption,

therefore, long-term debt is projected to remain stable through 2001.

Capital Lease Obligations

Kmart’s capital lease agreements are set up on a 25 year term with a 5 year

renewable option. The majority of stores closing are likely going to be leased stores and

capital lease obligations decreased by approximately 26% between 1996-1998. Between

1996 and 1997 leases decreased approximately 7.46% attributed to store closing. Capital

leases are projected to continue to decrease by approximately 7% for year ended 1999

which a decline attributed to the majority of the stores being closed are likely to be leased

facilities. For years ending 2000 and 2001 leases are expected to remain stable less

minimum lease payment. In order to be more in-line with the industry as their peers own

approximately 95% of their stores, Kmart’s management should restructure their leases

where allowable.

Other Long-term Liabilities

Kmart financial statements did not provide any specific information in regards to

the Other Long-term liabilities. Therefore, it is projected this account will remain stable

at $883 for years ending 1999-2001.

Net Worth

Convertible Preferred Securities

Page 17: KMART CORPORATION

Company obligated mandatory redeemable convertible preferred securities of a

subsidiary trust holding solely 7-3/4% convertible junior subordinated debentures of

Kmart (redemption value of $1,000). This account is projected to remain unchanged for

1999-2001 due to the minimal changes of .004% for years ending 1996-1999. In

addition, per Kmart press releases, their main focus is repurchasing common stock from

the open market for the next few years. Therefore, the projected change in equity will be

focused with those repurchases of common stock.

Common Stock/Capital in Excess of Par Value/Treasury Stock

The common stock account has remained relatively unchanged at .01% for years

ended 1996-1999. Kmart has announced they will be repurchasing their own common

stock from the open market as stated previously at a rate of $17 million shares for the

first year. It is projected they will continue to repurchase $17 million for years 2000-

2001. These transactions will increase the treasury stock account and the common stock

account will remain unchanged.

Retained Earnings

Retained earnings will continue to grow for 1999-2001 by the retention of profits

for all projected years. Kmart does not pay common stock dividends and the projections

do not include a change of that policy.

Significant Changes in Ratios

As a result of these projections, Kmart’s key management and profitability ratios

continue to move towards industry standards. The following section will briefly

summarize the financial ratios with an emphasis on ratios that indicate significant

changes.

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Liquidity Ratios

Current Ratio and Quick Ratio

The current ratio and quick ratio both remain relatively stable as seen in the table

below. The current ratio in trending towards the industry standard with stable inventory

in common size percentage and higher current liabilities due to the increase in APDOH.

The quick ratio also remained relatively stable for years ended 1999-2000 also

attributed to the higher current liabilities. This ratio remains below the industry standard

of .4.

1996 1997 1998 1999 2000 2001 RMALiquidity Ratios Current Ratio 2.15 2.28 2.12 2.04 2.03 2.06 1.6 Quick Ratio 0.38 0.34 0.35 0.29 0.30 0.34 0.4

Management Ratios

As seen below, the projections are resulting in positive trends for both the

INVDOH and APDOH. Consequently both the operating cycle and cash conversion

cycle are also on a positive trend moving towards the RMA industry averages. Each item

will be discussed below.

1996 1997 1998 1999 2000 2001 RMA ARDOH 0 0 0 0 0 0 2 INVDOH 95.09 92.40 90.64 91.16 88.94 87.00 73 APDOH 30.06 27.91 28.39 30.00 30.00 30.00 33 Operating Cycle 95.09 92.40 90.64 91.16 88.94 87.00 75 Cash Conversion Cycle 65.02 64.49 62.25 61.16 58.94 57.00 42

INVDOH

Page 19: KMART CORPORATION

By holding inventory at a constant of 47% as a percentage of total assets

INVDOH is trending towards the industry norm of 73 days as found on the common size

balance sheet. In 1999, INVDOH is slight higher at 91.16 days in comparison to the

90.64 days in 1998. This increase is attributed to the common size percentage of

inventory in 1998 was 46.14% in comparison to the 47% in 1999. For years ending 2000

and 2001 INVDOH is 88.94 and 87.00 respectively.

APDOH

Historically over the three year period 1996-1998, as seen in the above table,

APDOH has been lower than industry at an average of 28.78 days versus industry norm

of 33 days. In the projection, APDOH was set to 30 days to be closer to the industry

norm. Consequently an additional $83 million dollars in cash was available for

additional purposes.

Operating Cycle and Cash Conversion Cycle

The improvement of the INVDOH and slowing APDOH resulting in a positive

trend towards the industry standard for both the operating cycle and cash conversion

cycle as seen in the above table. Kmart still needs to improve their operations by

continuing to improve their INVDOH and APDOH at a reasonable rate of change.

Coverage Ratios

The overall coverage ratios are also moving toward the industry trends as seen

below.

1996 1997 1998 1999 2000 2001 RMA

EBIT / Interest 1.73 2.15 3.72 4.55 5.19 5.89 12.2

Page 20: KMART CORPORATION

Total Debt / EBIT 10.49 9.15 6.60 6.25 5.86 5.56 2.4

EBIT/Interest

EBIT/Interest is projected to improve over the next three years 1999-2001 due to

the increase in earning before profits. The increase in earnings before profits is attributed

to the increase in sales and continued leverage of SG&A expenses. This improvement is

attributed to the overall projected stability of long-term debt resulting in decreased

interest expense.

Total Debt/EBIT

Kmart is moving towards industry standards of total debt on the balance sheet as

seen in the common sized statements. Long-term debt is decreasing and remaining

relatively stable for years ending 1999-2001. Likewise, capital leases are also decreasing

attributed by store closings. Total long-term debt is 17.81%, 16.12% and 14.38% as a

percentage of total assets for years ending 1999-2001 moving towards the industry trend

of 12.90%. Consequently, the ratio continues to move in a positive direction.

Operating Ratios

The operating ratios are also trending toward the industry standards with

increasing profits, the retention of profits and management’s decision to repurchase

treasury stock.

1996 1997 1998 1999 2000 2001 RMA

Operating Ratios % Profit before Taxes/ Tangible Net Worth 5.43 6.52 11.56 12.79 13.23 13.28 31.9 % Profit Before Taxes / Total Assets 2.31 3.08 5.63 6.32 6.75 7.03 12.3 Sales / Net fixed assets 5.48 5.88 5.69 5.69 5.86 6.14 12

Profit before Taxes/Tangible Net Worth

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Profit before taxes is increasing at 2.62%, 2.73% and 2.79% for years ending

1999-2001. These increases are primarily attributed to the absence of the voluntary

retirement program expense and reduction in interest expense. Kmart’s retention of

profits each year is improving Tangible Net Worth from 48.32% in 1998 to 49.38%,

51.03% and 52.93% for years ending 1999-2001. The average tangible net worth of

49.58% is now comparable to the industry average of 48%. Therefore, in order for Kmart

to continue to move in a positive trend towards the industry, profit margins will need to

continue to improve.

Profit before taxes/Total Assets

The profit before taxes/ total assets ratios is trending toward the industry norm.

The profit before taxes percentages as discussed above are improving. However, this

ratio is also improving to due to marginally decline Total assets due to the control of

inventory at 47% of total assets and the slight decline in total fixed assets as discussed

previously in the paper.

Sales/Net fixed assets

Sales are increasing at a rate of 6.5%, 7.5% and 8.5% for years ending 1999-2001

and net fixed assets although increasing in 1999 by 6.5% are slowing declining in years

2000-2001. Consequently, the sales/net fixed asset ratio is improving and moving

towards the industry norm as seen in the other ratios described in this section.

Conclusion

The focus in these projections was to forecast into 1999-2001 with results of

positive movement towards the industry averages. The specific areas of change were

inventory control, extension of APDOH, stability of long-term debt and reduction in

Page 22: KMART CORPORATION

other expenses that improved profit margins resulted in Kmart moving towards industry

trends. The changes projected were gradually adjustments to ensure Kmart management

would not overestimate in one area of their statements while under estimating in another.

The overall results of the projections were positive decisions for Kmart.

With the changes in the economy and the discount retail industry, these

projections will need to be continually reviewed and modified. Consequently, Kmart will

ensure they maintain their position of moving towards industry trends and improving

their position within the industry.

Page 23: KMART CORPORATION

APPENDIX 1

Financial Statements and Ratios

Page 24: KMART CORPORATION

APPENDIX 2

Cost of Capital for Kmart

Page 25: KMART CORPORATION

BIBLIOGRAPHY

Attention Internet Shoppers; About Kmart Press Releases, December 15, 1999. http://www.kmart.com/corp/d_about/d 6hdln/d6c_pr/pr991215.stm

Company Profile and Company News; February, 2000. www.bluelight.com

Kmart announces executive retirement; About Kmart Press Releases, January 14, 2000. http://www.kmart.com/corp/d_about/d6_hdln/d6c_pr/pr000114.stm

Kmart announces retirement of General Counsel; About Kmart Press Releases, January 11, 2000. http://www.kmart.com/corp/d_about/d6_hdln/d6c_pr/pr000112.stm

Kmart Corporation Audited Financial Statements, 1996-1998.

Kmart launches Kmart Stock Direct, a new direct stock purchase plan on Bluelight.Com; About Kmart Press Releases, February 1, 2000. http://www.kmart.com/corp/d_ about/d6_ hdln /d6c_pr/pr000201.stm

Profile-Kmart Corp. (NYSE:KM); March 2, 2000. http://biz. yahoo. Com / p / k/km.html.

Robert Morris Associates Discount Retail Industry Data, 1998.