Kmart Closing Stores, Slashing Jobs

Updated from 10:40 a.m. EST

Kmart (KM Quote - Cramer on KM - Stock Picks) rolled out the first stage of its revamping Friday morning, saying it would close 284 stores and slash 22,000 jobs to improve its financial performance.

Kmart said it would take a charge of $1.1 billion to $1.3 billion to cover the costs of the moves, which are expected to goose cash flow by $550 million this year. The moves will boost annual earnings before interest, taxes, depreciation and amortization by $31 million, Kmart said.

The debt-heavy discount retailer filed for Chapter 11 bankruptcy protection in January after a weak holiday season raised its cash-flow problems to crisis levels. Just ahead of that filing, the company hired a new management team to oversee its restructuring.

The company has long been expected to close underperforming stores and trim jobs to reduce its cost structure, but analysts remain unclear on whether Kmart's business is sustainable even after the cuts, considering the strong inroads made by Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks) and Target (TGT Quote - Cramer on TGT - Stock Picks) in recent years.

And with Kmart closing stores in markets where Wal-Mart has a presence, it will be a further boon to Wal-Mart, one analyst said Friday. The closings create a $2.5 billion to $3 billion opportunity for Wal-Mart, estimates Emme Kozloff, an analyst at Sanford Bernstein. She estimates the round of Kmart closings could add between a penny and 3 cents to Wal-Mart's annual earnings per share. (She has a market outperform rating on Wal-Mart and her firm does not do investment banking.)

Also at issue is whether the current round of store closings is enough. Analysts originally predicted the company would need to close between 500 and 700 of its more than 2,100 stores for Kmart to right its ship.

Investors, however, seem to have plenty of confidence in Kmart's turnaround hopes -- perhaps too much. Shares rose 8 cents Friday to $1.32, meaning they have doubled from their post-bankruptcy filing low of 66 cents.

Yet many observers have told TheStreet.com that investing in the stocks of bankrupt companies is a treacherous business. Even if Kmart thrives following its emergence from Chapter 11, the stock outstanding now isn't likely to be a good investment. Existing common stock is typically cancelled in bankruptcy proceedings as assets are restructured to benefit creditors; in many cases, new equity is issued primarily to creditors and new court-approved investors.

But stock holders are trying to get a seat at the table. A group of institutional holders of Kmart stock have retained Saybrook Capital, a California banking firm, and the Chicago law firm of Goldberg Kohn Bell Black Rosenbloom & Moritz to ask the bankruptcy judge to appoint an equity committee. A decision is expected within two weeks, according to published reports.