Updated from 10 a.m. EST

Kmart

(KM)

ended an anxious silence Thursday, naming an outsider to oversee management. But the nagging financial questions that pushed its shares into the abyss remain unanswered.

The Troy, Mich., company, whose shares have collapsed as bankruptcy worries mounted over the last week, named James Adamson chairman, stripping Charles Conaway of that title. Kmart said Conaway would remain as CEO and that President and Chief Operating Officer Mark Schwartz had departed.

Kmart shares staged a mild rally before slipping back into the red; they were off a dime at $1.50 around noon. Some 35 million shares had traded, making Kmart the NYSE's most active issue for a second straight day.

Staggering

The announcement won't do much to discourage the vultures circling around Kmart lately. As much as Wall Street might welcome a management shakeup at the cash-strapped discount retailer, it's far more interested to learn of the outcome of talks Kmart is having with its lenders over a much-needed credit line extension.

But Kmart's only comment on the credit question Thursday was that the talks were continuing. Otherwise, Kmart reiterated what it had previously said: that it is reviewing its liquidity and business plans for 2002 and 2003. Kmart has said it has some $300 million in cash on hand, but a poor holiday season has clearly reduced investor confidence in the company's finances.

Adamson, 53, has been on Kmart's board since 1996. He is the former chairman and CEO of Advantica Restaurant Group, which operates the Denny's chain.

Shake and Bake

The executive takes the chairman spot at Kmart at a time when few people on Wall Street expect the company to survive in its current form. Only a month ago it was widely assumed that while Kmart would need to close some underperforming stores to cut costs, its basic problems weren't unfixable. But now it's clear Kmart won't emerge from this turmoil as the same company.

Indeed, Conaway spoke in Kmart's Thursday morning press release of Adamson's "extensive experience in retail and in managing change at companies undergoing massive transformation" as "a resource that we believe will be invaluable to our senior management team."

A bankruptcy filing now could give Kmart time to renegotiate leases, close stores and get out from under its crushing debt load, analysts say. At least 250 of the company's 2,100 stores need to be shuttered as the first step of any restructuring plan, these people say.

Still, others have wondered whether Kmart is sufficiently profitable at its core to justify a Chapter 11 reorganization. With more profitable rivals like Wal-Mart and

Target

taking market share, bears are wondering how long Kmart can stay in business even if it does reduce its crippling debt load and shed unprofitable stores.

Sea Change

As the New Year drew near Kmart stock was already more than 50% below its 52-week high of $13.55, set in August. That downdraft suggests many investors were already taking a skeptical view of the turnaround being engineered by new CEO Conaway. Still, Wall Street remained mostly supportive; as recently as October, according to Yahoo! Finance, half of the 14 analysts covering the stock rated it either buy or strong buy.

Wall Street's quiet support for Kmart began weakening during the holiday season, which was expected to be bleak across the retail sector as a result of the recession and September's terrorist attacks on New York and Washington. But as numbers rolled in it became apparent that many discount retailers were actually seeing solid gains and that Kmart, in posting a sales decline and forecasting a holiday-quarter loss, was the laggard.

As evidence of Kmart's deterioration emerged, the debt-rating agencies were the first to take action. With $4.7 billion in debt to service, Kmart is vulnerable to any reduction in cash flow that might result from weaker-than-expected sales.

So when the company said Jan. 10 that holiday sales had indeed fallen behind plan, investors and the rating agencies began taking the possibility of a bankruptcy filing more seriously. Moody's has been the most aggressive, cutting Kmart's ratings three times in the last month alone, but rivals S&P and Fitch have followed suit. Meanwhile, suppliers and trade creditors have begun withdrawing their support, observers say, worrying that they won't be repaid if Kmart's cash crunch worsens.

The stock has now plunged seven days in a row, giving up 70% of its value over that span. Kmart, long the nation's largest retailer but now supplanted by

Wal-Mart

, has seen its market capitalization shrink below $1 billion -- meaning that unless the stock enjoys an unlikely recovery, Kmart's days as a big-cap retail name are history.