KMART CLOSES SHOP

As had been rumored for weeks, Kmart filed for bankruptcy today, making it the largest U.S. retailer in history to do so. At over $17 billion in pre-bankruptcy assets, the troubled mass merchant more than doubled the old record set by Federated Department Stores in 1990.

It's also a nightmare come true for rack-jobber Handleman, left holding the bag for a reported $63 million in receivables in music-related products. Although Handleman's exposure is said by industry insiders to be a brutal blow, many think that it most likely won't be enough to put the wholesaler in danger of having to file for protection itself. Handleman released a statement stating that even though it expects its third-quarter results to be hurt by the bankruptcy, it does not expect long-term profitability to be damaged. Kmart represents some 35% of Handleman's fiscal 2001 sales, with Wal-Mart its largest account.

Said Handleman Chairman/CEO Stephen Stromm: "As we do with all of our customers, we're working closely with Kmart to do whatever is needed to help them accomplish their objectives."

The five major distributors do not sell Kmart CDs directly, but what the ripple effect will mean to them has yet to be determined. Will Handleman be asking for the labels to share in the haircut? In light of Kmart also setting a record for DIP (debtor in possession) financing in the amount of $2 billion, it might be too early to tell just how big the final haircut will be. There is also the question of how much exposure the Big Five will experience on video product that was supplied directly to Kmart. Buena Vista, for example, is on the hook for some $56 million in receivables. Expect more action to come.