Kmart Case Report
Kmart – The Game of Bankruptcy
Executive Summary
Under the protection of Chapter 11, Kmart secured $2 Billion in debt financing and successfully emerged from bankruptcy after conducting financial restructurings and business reorganization. Hedge funds saw investment opportunities from the company’s new capital structure and growth potential, while debtors had the chance to receive recoveries according to their level of seniorities. A deeper examination of this case also revealed a significant amount of inequitable wealth transfer among creditors, which brought to our speculations about the valuation of Kmart during the D-I-P. It’s a game played among the company, the claimers, the investors, the market and the Court. In this Kmart case, the management team and the hedge fund investors were the ultimate winners.
By 2000, Kmart’s margin had been tightening throughout the 80s. Increasing competition from other retail stores such as Wal-Mart and Target lowered its market share (from 30% to 17%). Due to the lack of a visionary strategy, Kmart tried what would end up being a failed strategy: to advance in both fronts, discount and specialty. Not only execution was poor, but the customer satisfaction was deteriorating at levels never seen before. By the time Chuck Conaway took charge of the company in 2000, the internal structure and external image of Kmart was delicate. Conaway’s aggressive but wasteful plan only worsen the financial performance – although revenues and cost of goods sold had been increasing, the selling, general and administrative expenses jumped to 20% of revenues, surpassing the operating margin. Surely, the new management was not too concerned on how their excess would impact the basic finances of Kmart.
Other than the wasteful spending, since Conaway came to power Kmart underwent a new strategy that was focused on destroying the competition at any cost. In the beginning, this meant a dishonest price war with both Wal-Mart and Target. When
Executive Summary
Under the protection of Chapter 11, Kmart secured $2 Billion in debt financing and successfully emerged from bankruptcy after conducting financial restructurings and business reorganization. Hedge funds saw investment opportunities from the company’s new capital structure and growth potential, while debtors had the chance to receive recoveries according to their level of seniorities. A deeper examination of this case also revealed a significant amount of inequitable wealth transfer among creditors, which brought to our speculations about the valuation of Kmart during the D-I-P. It’s a game played among the company, the claimers, the investors, the market and the Court. In this Kmart case, the management team and the hedge fund investors were the ultimate winners.
By 2000, Kmart’s margin had been tightening throughout the 80s. Increasing competition from other retail stores such as Wal-Mart and Target lowered its market share (from 30% to 17%). Due to the lack of a visionary strategy, Kmart tried what would end up being a failed strategy: to advance in both fronts, discount and specialty. Not only execution was poor, but the customer satisfaction was deteriorating at levels never seen before. By the time Chuck Conaway took charge of the company in 2000, the internal structure and external image of Kmart was delicate. Conaway’s aggressive but wasteful plan only worsen the financial performance – although revenues and cost of goods sold had been increasing, the selling, general and administrative expenses jumped to 20% of revenues, surpassing the operating margin. Surely, the new management was not too concerned on how their excess would impact the basic finances of Kmart.
Other than the wasteful spending, since Conaway came to power Kmart underwent a new strategy that was focused on destroying the competition at any cost. In the beginning, this meant a dishonest price war with both Wal-Mart and Target. When