Kmart Running Out Of Believers

Updated from 3:16 p.m. EST

When cash isn't a necessity it's a luxury. Two consumer giants were finding that both purposes had their perils Wednesday.

By far the worse off of the two is KmartKM, which this morning saw its shares plummet to a two-decade low after an analyst told investors the discounter's turnaround hopes were a pipe dream. The company, which was forced to defend itself publicly against speculation it could eventually face a bankruptcy filing, recently saw its shares falling 77 cents to $4.69.

Back on this side of the abyss, investors were selling eBayEBAY, in part because of concerns about its ambitious expansion plans.

Fire Sale

The Kmart rout was prompted when Prudential analyst Wayne Hood cut the company's shares to sell from hold, slashed his fourth-quarter earnings estimate to 20 cents from 43 cents, and said the retailer would probably post a loss instead of earnings for all of 2001. Hood blamed the lowered estimates on weak sales.

Worse, at least for investors, Hood raised the specter of bankruptcy protection if the earnings shortfall pressures cash flow to close to nothing next year. While no filing is imminent, Hood said, he "would not be surprised" if one became necessary.

"We estimate these EPS reductions place additional pressure on cash flow in 2001 and 2002," jeopardizing the company's ability to fund overhauls of some stores, he wrote. Kmart didn't immediately return calls seeking comment, but the company told Reuters it has sufficient funds to carry out its strategies.

Eric Beder, a Ladenburg, Thalmann & Co. analyst, said the company's bankruptcy risk is small. While it has a large $1.8 billion debt obligation pending, that doesn't come due until December 2002, and a restructuring should be completed in the first quarter, he said.

Bankruptcy "is possible, but it would require a tremendous number of bad things to happen," Beder said.

Analysts attribute the weakness in Kmart's sales to reductions in promotions and advertising, part of its plan to reduce costs to a level where it is competitive with Wal-MartWMT. The company was spending 2.5% of sales on advertising, versus 0.75% of sales at Wal-Mart, and has been trying to cut back. Comparisons with 2000 are also particularly tough, because a massive liquidation of inventories at the end of that year contributed heavily to fourth quarter sales.

Kmart is working on a restructuring program that entails overhauling stores, slashing prices, and revamping its supply chain operations, but the once-high hopes for it have since faded. The company's shares are down about 60% from their 52-week high

On Monday, Kmart told investors that sales from Dec. 20 to Dec. 26 were "above plan,'' with high-ticket items particularly strong. But for the month of December, the retailer said its sales were below its previous plans, the low end of which was for flat sales.

Still Tight

Kmart faces no immediate relief, analysts say, as it will have to continue competing in an environment of heavy discounting, particularly this month.

"January is a clearance month," says Ira Silver, senior retail analyst at Telecheck Services. "There's still a lot of heavyweight merchandise out there that will have to be cleared. I wouldn't be surprised if we have continued discounting, probably more than last year."

U.S. chain store sales rose 2.6% in the fourth week of December versus 2000, compared with a 2% increase the previous week, according to the Bank of Tokyo Mitsubishi-UBS Warburg weekly chain store sales report, as consumers rushed to grab bargains and buy winter apparel.

On the Margin

Holiday Internet sales were also strong. According to comScore networks, holiday Internet sales are now seen jumping 15% versus last year to $10.5 billion. The research firm was originally expecting $10 to $10.25 billion. Online sales are also expected to grow more than 40% in the fourth quarter versus the third quarter, with apparel and consumer electronics taking the lead.

Despite the outlook, Robertson Stephens analyst Laura Levitan downgraded eBay this morning, citing a 103% share price gain over the past year and potential margin pressure from anticipated investment spending.

Levitan expects eBay to spend heavily on international and category expansions, as well as brand marketing, in the near term. Typically, the company's shares post strong gains in the first half of the year, driven by strong earnings growth in fourth quarter and first quarters. "While we continue to look for superior earnings and revenue growth, we do not anticipate the dramatic levels of outperformance as in 2001."

Despite the downgrade, Levitan hiked her fourth quarter earnings estimate to 14 cents per share from 13 cents per share and raised her price target on the company to $75 from $70. It didn't help the shares, which were recently off $1.21 to $65.88.