Kmart Files Bankruptcy, Largest Ever For a Retailer

The Kmart Corporation filed for bankruptcy protection yesterday, the largest such filing ever made by a retailer.

Speculation on Kmart's financial condition had been intensifying for weeks as the company faced a cash shortage that was accelerated by a slump in holiday sales and a failed price-cutting campaign. But Kmart's underlying problems had been mounting for some time as it lost ground to Wal-Mart, the nation's No. 1 retailer, and Target, the discount retailer known for its relatively fashionable merchandise.

Kmart, the nation's third-largest discount retailer, said yesterday that all 2,114 of its currently operating stores would remain open for now. But analysts say that several hundred stores will be closed after a corporate review is completed at the end of April, which could mean layoffs for thousands of the company's 240,000 workers. Kmart will also extricate itself from leases on some 350 stores that it has already closed or leased to other companies.

Since its start in 1962, Kmart has become a fixture on the American landscape, known for its blue light specials, in-store announcements (''Attention, Kmart shoppers!'') and the big red K's that adorn its storefronts.

Kmart's fall is bad news for an economy already stung by Enron, which made the largest bankruptcy filing in history less than two months ago, and ripples will be felt by creditors and suppliers. Yesterday, companies ranging from Eastman Kodak to Delta Galil Industries, a small Israeli underwear maker, said they had millions of dollars in payments outstanding.

Kmart's stock, which closed as high as $13.16 last August, fell another 60 percent yesterday, closing at 70 cents. This will be a blow to some workers, who as a group have about 14 percent of their 401(k) assets in Kmart stock.

Charles C. Conaway, Kmart's chief executive, said in a statement that ''after considering a wide range of alternatives, it became clear that this course of action was the only way to truly resolve the company's most challenging problems.''

In filings with the United States Bankruptcy Court in the Northern District of Illinois, in Chicago, Kmart listed $16.29 billion in assets and $10.35 billion in debt. At the end of the financial quarter ended Oct. 31, Kmart had $366 million in cash.

The company has secured $2 billion to finance its continuing operations from a group of banks led by J. P. Morgan Chase, and it said it would emerge from bankruptcy protection sometime next year. Analysts, however, said the company had yet to develop a successful strategy to position itself against the other retail giants.

Wal-Mart has laid claim to the penny pinchers. Target has identified with style-conscious suburbanites by offering modish brands like kitchen utensils and teakettles designed by the architect Michael Graves. ''It's not a natural gimme that there is room for Kmart,'' said Emme P. Kozloff, an analyst at Sanford C. Bernstein.

Eighteen months ago, when Mr. Conaway took Kmart's helm, he promised that a turnaround would be apparent in two years. Instead, tactics like trying to beat Wal-Mart on pricing and reducing advertising in circulars have not worked.

Kmart has long been known for its boom and bust cycles. The chain was started in 1962 as a discount division of the S. S. Kresge Company, a five-and-dime store that was F. W. Woolworth's chief competitor during the first part of the century. The vast stores were put outside cities in bustling new suburbs.

At first Kmart and the suburbs were a perfect match. The chain grew rapidly, and housewives reveled in its well-priced abundance. Within a decade, Kmart had 673 stores and rivaled Sears, Roebuck as the nation's largest retailer. But it was during this period of rapid expansion that Kmart grew complacent. In 1973, the company experimented with using computers that could track inventory and make orders. But store managers, who filled out orders by hand, rejected the computers, predicting, accurately, that the new technology would reduce their autonomy, according to ''In Sam We Trust,'' a history of the rise of Wal-Mart (1998, Times Books).

Kmart decided to pass on computers, but its competitors did not. Sam Walton put the systems in anywhere he could afford to, and the added efficiencies paid off over time. Today, as the world's largest retailer -- and one of its most efficient -- Wal-Mart does roughly fives times the business of Kmart, $200 billion in annual sales.

Over the years, Kmart failed to keep its stores looking fresh, and its fashions became dowdy. So ingrained in the public culture was Kmart as a purveyor of polyester that in the 1989 film ''Rain Main,'' Dustin Hoffman's autistic character yells Kmart insults.

Kmart tried hard to fix its problems. In 1997, the company signed up Martha Stewart, then an emerging merchandising star. Last year, her company, Martha Stewart Living Omnimedia, did $1.6 billion in sales through Kmart. Yesterday, Martha Stewart said she would continue with Kmart while it was in bankruptcy despite being owed roughly $13 million.

Kmart has every intention of reviving itself, but the track record of smaller discounters that have run into trouble shows how difficult such changes can be. Montgomery Ward tried to come back after declaring bankruptcy in 1997 and even had the backing of General Electric, its parent, but it declared bankruptcy again at the end of 2000 and went out of business. Bradlees emerged from bankruptcy in 1999 only to file again the next year and go out of business.

Kmart's urban stores, including 10 in New York, are least likely to close because they generally have higher sales volumes and less competition from Wal-Mart and Target, consultants said. But elsewhere, the outlook is often bleak.

''In suburban and rural areas, Wal-Mart is pounding Kmart into the ground,'' said Burt Flickinger III, a retail consultant. ''In those areas, Kmart stores will largely go dark.''