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Author: howardroark Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: Re: Kmart Date: 1/15/2002 2:46 PM
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Am I doing this correctly?

I think you're probably undervaluing inventory. 80% for a discount reatiler is probably more like it in liquidation, even for an inefficient merchandiser like KMT. Also, you didn't add the $194m LIFO reserve.

I think you're probably vastly overvaluing "other current assets," which are likely composed in large part of things like pre-paid advertising expenses and leasehold improvements to owned stores expected to be leased within 12 months. I might give a 0X multiplier here if I didn't know more. 10% max.

I also think you're way overestimating PP&E realization value upon liquidation. The majority of PP&E book is furniture and fixtures (0-30%) and leasehold improvements (0-10%), which probably account for around $5 billion or so of the total.

More importantly, you're omitting some important senior liabilities. KM has $7 billion in net, undiscounted non-cancelable operating lease commitments that are OBS. Some of those will be assumed, but the bad ones will be (1) terminated at a loss or (2) subleased at a loss. Considering the proximity of Kmarts to WMT, the leases may well be a difficult assumption scenario. Even the 121-owned stores are going to lose most of their improvement and fixture value seeing as potential buyers are going to very wary using them to operate the same sort of business that flailed against WMT and TGT, and WMT and TGT may be too close to have any interest. This is a significant liability (though hard to estimate, certainly much less than $7 billion, but arguably as high as $2 billion). Next, as you mentioned, the covertible preferreds are senior and also have to be subtracted as debt. Finally, an estimated wind-down cost, which would be fairly significant in KM's case thanks in part to severance, is also in order.

KM is not even close to a good liquidation story at current prices from my perspective (no opinion on going concern prospects). Here's a brief but interesting look at a retail liquidation analysis.

http://lopucki.lawlib.ucla.edu/BRD_Documents/Bradlees%202000/bradlees-disc3.pdf






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