Kmart's 20 Quarter OPS chart identifies a break in its historical pattern from positive to negative OPS. Item A shows Kmart's positive OPS pattern (Green). Kmart generated positive OPS for three consecutive first quarters. Item B shows the break in Kmart's positive OPS pattern (Red). The pattern broke on May 17, 2001 when Kmart indicated negative OPS for its first quarter with its shares closing at $10.58 near its 52 week high. This break in the pattern was the first signal of a possible liquidity crisis for Kmart. On May 18, 2001, one day after the pattern broke Merrill Lynch upgraded Kmart. Shortly thereafter, Bear Stearns and UBS Warburg also upgraded Kmart. Eight months later Kmart declared bankruptcy and Kmart's shares traded below $1.

Wall Street bases its research recommendations on the EPS it is forecasting for a public company. For the most part a company's OPS or its operating cash flow is not examined before an analyst issues a buy rating. By examining Kmart's restated financials one can see Wall Street's rational as to why it recommended Kmart months before it filed for bankruptcy. It is likely that Merrill Lynch and Bear Stearns buy recommendations on Kmart in the summer of 2001 was based on the brokerage firms' forecasts for Kmart's 4th quarter EPS which is typically its strongest. See Kmart 4th fiscal quarters for 98, 99, 00 and 01 in charts above (highest green and black bar charts). For the brokerage analysts which were basing their recommendation on the future, Kmart's small loss of $.05 per share in item B above was insignificant when compared to the previous 4th quarter in item A above where Kmart generated a profit of $.06. Had the analysts been tracking OPS they most likely would not have recommended Kmart since its OPS went from a positive $.37 in item A to a negative ($.57) in item B. The $.94 per share swing (+.37 to -$.57=$.94) in its OPS is significant especially when it is compared to the insignificant $.11 per share swing (+.06 to -$.05 = $.11) in Kmarts' EPS.

Kmart's restated financials give further support to the argument that OPS is a more valid indicator than EPS and that Wall Street analysts should be using it in formulating their buy and sell recommendations. On June 12, 2002, Kmart restated its financial for its quarter ended April 30, 2001 (Q1 2002, originally filed on May 17, 2001). Item B depicts that Kmart originally reported an EPS deficit of ($.05) (Gray) and an OPS deficit of ($.57) per share (Red). Item C depicts Kmart's restatement of its EPS to a deficit of ($.48), which is a multiple of 8 times greater than its originally reported EPS deficit of ($.06). Kmart's OPS was unaffected by the restatement indicating that OPS is a more stable indicator than EPS.