Kmart files for Chapter 11 bankruptcy

TROY, Michigan (CNN) -- Kmart filed for bankruptcy Tuesday, the corporation announced in a statement, in order to "aggressively address" recent financial and operational problems.

"We are determined to complete our reorganization as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," said Kmart CEO Charles C. Conaway. "We deeply regret any adverse effect today's action will have on our associates, vendors and business partners."

The retail giant will file for Chapter 11 bankruptcy, which will allow it to restructure operations and emerge as a viable company.

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Kmart said all of its 2,114 stores are still open for business. The company employs over 250,000 people.

The number three U.S. retailer has struggled to make payments to its vendors and creditors. The move had been widely expected but company officials had declined to comment.

Kmart plans to fund its turnaround and continued operations with the help of a $2 billion financing package, subject to approval by the bankruptcy court. It expects to emerge from Chapter 11 status next year.

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U.S. retail discounter Kmart has filed for bankruptcy protection but says it will keep its stores open for business. CNN's Sean Callebs reports (January 23) Play video (QuickTime, Real or Windows Media)

If Kmart does go bankrupt, analysts worry it could lose its best-known brand, Martha Stewart. Her company's broad line of home and garden products accounted for $1.5 billion of Kmart's sales in 2001.

Although Martha Stewart denied on CNN Wednesday that she would end her relationship with Kmart if the company files for Chapter 11 bankruptcy, speculation about this has been another factor plaguing Kmart's stock.

Analysts say Kmart management made two big mistakes during the holiday shopping season -- cutting back on advertising and entering a price war with Walmart.

The question is whether Martha Stewart, Kathy Ireland or Jacqulyn Smith brands can help Kmart overcome its greatest challenges: competing with Target's trendy image and beating Walmart's rock-bottom prices.

"Unless Kmart can get more exclusive deals such as the one they have had with Martha Stewart or comes up with some other strategy, it's going to be tough for them to compete -- especially now," said Mike Porter, a retail analyst with Morningstar.

Analysts say they do expect Kmart to survive this crisis especially since one of Kmart's biggest strengths is its prime real estate location in urban markets. But they say Kmart may eventually end up a lot smaller -- and a lot different -- than it is today.