Kmart

KMART

Kmart, a wholly owned subsidiary of Sears Holdings Corporation is a mass merchandising company that offers customers quality products through a portfolio of exclusive brands and labels. Kmart is the #3 discount retailer in the US, behind Wal-Mart and Target. It sells name-brand and private-label goods (including its Martha Stewart label), mostly to low- and mid-income families.

More than one hundred years ago, Sebastian Spering Kresge opened a modest five-and-dime store in downtown Detroit and changed the entire landscape of retailing. The store that Kresge built has evolved into an empire of more than 1,500 stores and an Internet presence that reaches millions of customers. The Kmart name has become a symbol of Americana, standing for quality products at low prices. When Kresge opened his first store in 1899, he sold everything for 5 and 10 cents. The low prices appealed to shoppers and allowed him to expand to 85 stores in 1912, with annual sales of more than $10 million. By the 1950s, it was evident that the company needed to change to continue to be a leader in the growing competitive retail environment. That change came through Harry B. Cunningham, who became Kresge President in 1959. Cunningham had been studying other discount houses and developed a new strategy for the Kresge organization. Under Cunningham's leadership, the first Kmart discount department store opened in 1962 in Garden City, Michigan. Seventeen additional Kmart stores opened that year, leading to corporate sales of more than $483 million that year. Thirty years later in 1991, as part of the new plan, Kmart opened the first Kmart Supercenter in Medina, Ohio, offering a full-service grocery along with general merchandise 24 hours a day, seven days a week. This was the beginning of the new era. Kmart Super Centers range in size from 140,000 to 190,000 sq. ft. Kmart Super Centers feature in-house bakeries, USDA fresh meats, fresh seafood - delivered daily of course, a full delicatessen and a variety of specialty food kiosks. Now there are three different Kmart stores to shop: Traditional Kmart stores, Supercenters and Big Kmart. Big Kmart signals a different kind of Kmart. These stores are bigger, brighter and offer big savings, big value, big selection and big convenience. Big Kmart stores are designed to increase store sales by increasing the frequency of customer visits. The first Big Kmart opened in Chicago, Illinois on April 23, 1997.

On May 6, 2003, Kmart and 37 of its U.S. subsidiaries and affiliates emerged from the Chapter 11 reorganization process - 15 months after they filed for Chapter 11 in the United States Bankruptcy Court for the Northern District of Illinois on January 22, 2002. Under the leadership of President Julian C. Day, who was promoted to Chief Executive Officer in January 2003, the Company achieved several important objectives during its fast-track reorganization. The Company's accomplishments included strengthening its balance sheet and significantly reducing debt; securing $2 billion in exit financing; focusing its store portfolio on the most productive locations and terminating leases for closed stores; and developing a more disciplined, efficient organization and lowering its overall operating costs. Kmart emerged from Chapter 11 as a new and vital enterprise focused on delivering value to customers and stakeholders alike.

In 2004, Kmart Holding Corporation and Sears, Roebuck and Co. agree to merge. The new retail company named Sears Holdings Corporation will be headquartered in Hoffman Estates, IL The combination created the 3rd largest U.S. Retailer with $55 Billion in annual revenues and has a broader retail presence and improved scale and operational efficiency.

As of February 3, 2007, Holdings operated a total of 1,388 Kmart stores across 49 states, Guam, Puerto Rico, and the U.S. Virgin Islands. This store count included 1,333 discount stores, averaging 93,000 square feet, and 55 Super Centers, averaging 165,000 square feet. (www.kmart.com) Most Kmart stores are one-floor, free-standing units that carry a wide assortment of general merchandise, including products sold under such well-known labels as Jaclyn Smith, Joe Boxer and Martha Stewart Everyday. Most Kmart stores are one-floor, free-standing units that carry a wide assortment of general merchandise, including products sold under such well-known labels as Jaclyn Smith, Joe Boxer, and Martha Stewart Everyday. Approximately 100 Kmart stores sell an assortment of Sears's home appliances and by the end of 2006 all Kmart stores will carry an assortment of Craftsman tools. Approximately 1,100 Kmart stores also contain in-store pharmacies. Kmart also sells its products through its kmart.com website.

Financial Analysis

The Merger has provided Holdings a means for leveraging the historical strengths of Kmart and Sears with the goal of making the Company's products, brands and service offerings available through more locations and customer distribution channels. Furthermore, Holdings is striving to become more responsive to the needs of customers, thereby building long-term, value-added customer relationships. The Company will continue to explore opportunities to profitably cross-merchandise products and services between its Kmart and Sears.

The retail business is seasonal in nature, and the Company generates a high proportion of its revenues and operating cash flows during the fourth quarter of its fiscal year, which includes the holiday season. As a result, the Company's overall profitability is heavily impacted by its fourth quarter operating results. Additionally, in preparation for the fourth quarter holiday season, the Company significantly increases its merchandise inventory levels, which have traditionally been financed from operating cash flows and credit terms received from vendors. Fourth quarter reported revenues accounted for 31% of total reported revenues in fiscal 2006. During the first quarter of 2005, Kmart's common stock traded from January 27, 2005 until March 23, 2005, during which its high price was $133.85 and its low price was $89.37. Neither Holdings nor Kmart paid dividends on common stock in the last two fiscal years. From April 1, 2006 through March 27, 2007, approximately 5,700 shares of the Company's common stock were inadvertently allocated to the plan accounts of a total of 28 participants in two of the Company's defined contribution savings plans. These shares may not have been registered under the Securities Act of 1933 for sale to these plan participants. During this period, the Company's common share price ranged from a low of $130.65 per share (on April 3, 2006) to a high of $189.97 per share (on February 22, 2007). The Company received no proceeds from any of these transactions.

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