Financial Analysis

Kmart filed chapter 11 in the year 2001. This was not a sudden move, but rather a decision that came out due to continuous bad performance. Prior to 2001, company was making continues losses. In order to understand the scenario, we first analyze the period from 1995 to 1998. Here, Kmart came out of red and started making some profits. And then the second part, i.e. from the year 1998 to 2002, where they actually went bankrupt.

The Period: 1995-1997

In 1995, the firm suffered a huge loss of $571 million. This was because of the non performance of 127 international stores. It was in the same year that COGS as a percentage of sales too were high as 78%. Operating expenses as a percentage was in proportion to that of the industry. However due to the low performance of the international stores, i.e. Stores outside United States, Kmart had a bad financial year in 1995.

K Mart had sales of $ 34,389 in 1995 and was $ 32,183 in 1997 with a net profit of ($ 571) and ($ 249) respectively.

It was the same year that the management decided to do away with the non performing stores and thereby closed all its international stores and started four new stores in the home market. The list of stores by Kmart during the period can be seen under:

Table 3 Kmart Number of stores since 1995-97

Number of stores

1995 1996 1997
United States 2134 2136 2161
International 127 — —

It can be seen that even after closing 127 stores and after a net reduction of 123 stores, sales reduced from $34389 million to $ 31437 million only. That is decrease of just 8% which is quite high considering that 127 stores is quite a small number. This goes to show the kind of business done by Kmart in the international market.

In the year 1996 sales as mentioned decreased as compared to 1995; however, an important thing was that the percentages decrease in the COGS in 1996 was more than the percentage decrease in the sales. This indicates that COGS in the foreign market was higher than in the domestic market. In 1996, operating expenses reduced and were 19.96% of sales as compared to 21.97% in the previous year. Thus, after making some big corporate decisions Kmart was in a position to control looses, which gradually came down to $220 million from more then $550 million in the previous year.

Year 1997 was pretty good for Kmart where they actually started making profits, Sales increased in 2.3% compared to the previous year; however, COGS increased by 3.1% thereby reducing the percentage of gross margin. However, the company had better operational management and reduced operating expenses further to bring them down to 19.06% of sales thereby increasing the net profit.

The Balance sheet however, showed different picture altogether Cash as a percentage of current assets kept on declining. As seen Kmart once had a healthy 12 per cent cash share in current assets that eventually dropped down to 6.66% in 1997. In the same time merchandise too started increasing as a percentage of current assets, as seen from 70% in 1995 to 85% in 1997. What this shows is that the company did not have liquid funds to operate. On the contrary, merchandise was blocked in the form of closing stocks and thereby, hampered the liquidity of the company. During the same time Wal-Mart had merchandise as less as 60% of the current assets and cash equivalent of 15% of its current assets.

Current ratio throughout was decent. But this was due to the fact that current assets were high because of the huge merchandise stock. Next, we also determine the borrowing /asset ratio that shows the company’s policy growth. It can be seen that Kmart had heavily relied on outside sources for funding growth, results of which can be seen in the huge interest paid by the company.

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  • devarani

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