Despite reports of higher than expected sales for the last week of December, financial analysts predicted a grim future for Kmart stock.
Wayne Hood, an analyst for Prudential Securities Inc., downgraded Kmart’s stock from “hold” to “sell” Wednesday after the announcement that the company, based in Troy, Mich., had a third-quarter loss of more than $200 million.
“The analysts considered weak financial results for the fourth quarter as well as weak sales and earning expectations,” said Lawrence Meyers, first vice-president of Prudential Securities in Bloomfield Hills.
The downgrade preceded a 72-cent drop in price on Wednesday and a 65-cent drop on Thursday. The stock finished the week strong, however, gaining 62 cents on Friday to finish the week at $4.71.
Analysts from Edward Jones and UCB Warburg followed Hood’s precedent downgrading the company’s stock and lowering the 12-month price target, respectively.
In the report, Hood also asserted that the company could face the prospect of Chapter 11 bankruptcy if changes are not made.
Chapter 11 bankruptcy, the most common form of bankruptcy, frees a company from the threat of creditors’ lawsuits while it reorganizes its finances.
“The next six months are a critical time for Kmart,” Meyers said.
In order to prevent bankruptcy, the company will have to reverse some of the trends that led to Hood’s decision, Charles Ballard, professor of economics, said.
“There are two things you can do,” he said. “You can cut your losses or increase your revenues. Either one of those will increase the profitability of your company.”
Kmart already has put forward plans to increase its profitability by updating stores and separating the company from their rivals, said Stephen Pagnani, a Kmart spokesman.
“We’re improving our technology by updating our scanners and we just invested in two new distribution centers,” Pagnani said. “We hope to fix some of our flaws and further stand out against other companies.”
Local Kmart locations will not see many serious changes. The company plans to reduce each store’s inventory based on its demand, Pagnani said.
Layoffs will be expected, but only as many as are usually required after the holidays.
“We are doing layoffs,” Pagnani said. “We do that every year at this time and then we adjust our (employees’) hours for the month. January is not a strong sales month.”
Kmart’s key rivals, Wal-Mart and Target, saw large increases in stock price over the past year, compared to Kmart’s 77-percent drop over the same period .
Kmart, however, maintains an upbeat attitude in the face of competition, Pagnani said.
“Our philosophy is that competition ultimately benefits the consumer,” he said.
