Updated from 7:44 a.m. EST
Kmart (KM) sought Chapter 11 bankruptcy protection Tuesday in the largest-ever such filing by a U.S. retailer.
The move ended nearly two weeks of speculation and came after the discount retailer's situation with suppliers deteriorated over the weekend. The filing will buy Kmart time to assess its options, but it's not clear what the company might do to make itself viable in the face of rising challenges from rivals Wal-Mart and Target.
Kmart's board authorized the filing Monday after working to arrange $2 billion of post-petition financing to allow the company to keep operating under bankruptcy-court protection. Kmart said all its stores will remain open for now and that it hopes to emerge from bankruptcy next year. Kmart also named a chief restructuring officer, Ronald B. Hutchison, to work with the new chairman it named last week. Hutchison worked with Kmart Chairman James Adamson when both were at the Advantica Restaurant Group.In making the filing, Kmart cited a rapid decline in its liquidity resulting from below-plan sales and earnings in the fourth quarter, the evaporation of the surety bond market, and an erosion of supplier confidence. Other factors included intense competition in the discount retailing industry, unsuccessful sales and marketing initiatives, the continuing recession and recent capital market volatility, Kmart said. On Monday, Kmart's main grocery supplier, Fleming Cos. (FLM), said it was halting shipments after the company missed a payment. Fleming is trying to collect $78 million worth of goods already shipped but not paid for. Another supplier, Scotts Co. (SMG - Get Report), also stopped shipments to Kmart stores. Kmart management has often said the discount chain must restructure its stores, and analysts have predicted it might use the bankruptcy filing to get out of leases on more than 200 of them around the country. The company has seen its financial situation spiral downward after it missed its December sales goals and an analyst raised the prospect of bankruptcy in early January. The events touched off a cycle of downgrades by credit rating agencies and a selloff in its common shares. The shares plunged further Tuesday, recently trading down $1.05, or 60%, at 69 cents each. Kmart's filing comes slightly more than a month after the largest bankruptcy ever, Enron's.