Kmart bonds retreat as retailer warns of softer earnings, notes talks with lenders

By Paul Deckelman and Paul Harris

New York, Jan. 10 - Just when it seemed safe to go back to investing in Kmart Corp. shares and bonds, the discount retailing giant warned Thursday that its profit for the fiscal year ended Jan. 30 will be below analysts' penny-per-share expectations, and said it is talking with its lenders about possibly lining up some supplemental financing. That brought an abrupt end to the week-long rebound from recent lows seen in both its debt and its bonds.

In the primary sector Thursday, price talk was released on three deals set to price Friday from Rural Cellular, Interface Inc. and AMC Entertainment. And new deals from U.S. Oncology and Pathmark Stores emerged for pricing later in the month.

Back in the secondary, Kmart bonds "got beat up a little today," a trader said, quoting the Troy, Mich.-based department store operator's 8 3/8% notes due 2004 going home around the 75 bid/77 offered level, down from 77 bid/79 offered at the start of the session, while its 8 1/8% notes due 2006 had slipped to 67 bid/70 offered from 71 bid/73 offered previously.

"I think any time you see bad news at this time, you see people over-exaggerate," he said. "But who knows? It could be with good reason."

Kmart - whose bonds and shares had fallen sharply around the middle of last week but then had been rebounding steadily since then - said Thursday morning that December same-store sales were up 1% from the comparable year-ago period, but that overall net sales were essentially in line with last year's. It reported the same sluggishness for the 48-week period ended Jan. 2.

As a result of its December sales performance and other recent events, Kmart continued, it "does not expect to report earnings for the fiscal year ending January 30, 2002, consistent with analysts' current expectations," with the Wall Street consensus around one cent per share for the full fiscal year.

Kmart further said that in light of those developments, it was "continuing to review its current and prospective liquidity position and business plan for the 2002 and 2003 fiscal years, and in that regard, is in discussions with its lenders regarding its existing and possible supplemental financing facilities."

Kmart's bearish new guidance comes a week after Prudential Securities analyst Wayne Hood predicted a sharply reduced fiscal fourth quarter net from his earlier estimates, changed his forecast of a modest full fiscal year profit to a loss and warned that unless cash-flow improves, Kmart might have to consider a bankruptcy filing.

Another trader saw Kmart bonds likewise back a few points "across the board," but he added that "it doesn't look like they're headed back to the lows" which they had tumbled to the day Hood released his cautionary research note.

"It's almost as if people have said they (Kmart) can probably address their short-term and medium-term liquidity issues" by sounding out the bank lenders on the possibility of them fronting the company a bit more capital to tide it over the anticipated rough spots.

Having said that, however, he acknowledged that "at the end of the day, people still look at the operating results.

Kmart shares, meantime, fell 60 cents, or 12.50%, to $4.20 in New York Stock Exchange trading. Volume of about 13 million shares was double the average daily turnover.

Among communications issues, the trader said Level 3 Communications Inc.'s benchmark 9 1/8% senior notes due 2008 were unchanged around 52.5 bid/53.5 offered, while Williams Communications Group Inc.'s 10 7/8% paper lost half a point to around the 45 bid/46 offered area. Charter Communications' 9 5/8% senior notes due 2009, which previously had hovered at or near Tuesday's 99.301 issue price for its $350 million add-on tranche, "got a little bit weaker," he said, quoting the issue as low as 95.5.

The trader saw Enron Corp.'s bonds continuing to hang in the low-to-mid 20s, even as the number of planned official investigations of the failed Houston-based energy trading firm have multiplied and the company's auditor, Arthur Andersen, revealing that said some of its employees disposed of or electronically deleted "a significant but undetermined number" of documents relating to its audit of the now-bankrupt company. Enron creditors, meantime, have asked the New York bankruptcy court judge overseeing the company's restructuring to indefinitely delay the planned sale of its core energy-trading business.

Despite all of this static, he said, Enron's debt, such as its 7 7/8% notes were 23.5 bid, "probably up a point or two over the last few days. I don't think at this point anybody can get a handle on their balance sheet - or the off-balance sheet, as the case may be - but I think there is some sort of value there somewhere, otherwise, they wouldn't be sticking where they are, in the low 20s."

Rite Aid Corp. "got mowed down today," declared a trader who quoted its 11¼% notes around 85 bid/87 offered - a drop of about 15 points from prior levels near par. The slide followed the Camp Hill, Pa.-based drugstore chain operator's wider-than expected fiscal third-quarter loss and reduced cash-flow estimate for the rest of the year.

Rite Aid lost $112.8 million, or 23 cents a share, for the quarter ended Dec. 1, versus a loss of $105.7 million, or 34 cents a share, in the same period a year ago. But while the latest quarterly loss was smaller - at least on a per-share basis - than the year-ago deficit, it was larger than the 14 cents per share analysts had been expecting.

Rite Aid blamed its continued financial struggles on factors including the recession, the deepened U.S. economic turmoil in the post-Sept. 11 period, and "an especially competitive" drugstore environment, in which the company battles larger competitors Walgreen Co., the industry leader, and CVS Corp., the No. 2 U.S. pharmacy operator. Rite Aid is No. 3 - but along with its rivals must also combat a growing challenge from large retailers which are expanding their operations into traditional drugstore turf, like discounter king Wal-Mart Stores Inc.

Amid such conditions, Rite Aid lowered its estimates of EBITDA for the rest of the fiscal year (earnings before interest, tax, depreciation and amortization, a key bond market measure of cash-flow generation and debt-service ability) to $217.7 million from a previous forecast of a range between $265 million and $315 million.

For the next fiscal year, Rite Aid sees EBITDA of $530 million to $580 million, up from the $503.5 million which it projects for the current fiscal year.

Back on the upside, the trader saw lodging and gaming operator MGM's benchmark 9¾% notes due 2007 "moving up" a bit to around the 106.75 bid/107.75 offered area, while the same company's 8 3/8% notes due 2011 eased to around 100.5 bid/101.5, attributing the movements to investors switching out of the longer paper and into the shorter-dated issue. The latter, he said, had been around 105 bid/106 offered about a week ago, "so they've had a good little push to them."

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