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                                                                    EXHIBIT 10.3

                               FIRST AMENDMENT TO
                           LETTER OF CREDIT AGREEMENT

      This First Amendment to Letter of Credit Agreement (the "First Amendment")
is made as of the 4th day of October, 2004 by and among

      KMART CORPORATION ("Kmart"), a corporation organized under the laws of the
      State of Michigan having a place of business at 3100 West Big Beaver Road,
      Troy, Michigan 48084,

      BANK OF AMERICA, NATIONAL ASSOCIATION ("BOA"), a national banking
      association having a place of business at 100 Federal Street, Boston,
      Massachusetts 02110;

      FLEET NATIONAL BANK ("Fleet" and together with BOA, the "Issuing Banks"),
      a national banking association having a place of business at 100 Federal
      Street, Boston, Massachusetts 02110.

                                   WITNESSETH

      WHEREAS, Kmart and the Issuing Banks have entered into a Letter of Credit
Agreement dated as of August 13, 2004 (as amended and in effect, the "Credit
Agreement"); and

      WHEREAS, Kmart and the Issuing Banks have agreed to amend certain
provisions of the Credit Agreement as set forth herein.

      NOW THEREFORE, it is hereby agreed as follows:

1.    Definitions: All capitalized terms used herein and not otherwise defined
      shall have the same meaning herein as in the Credit Agreement.

2.    Amendments to Article 1. The provisions of Article 1 of the Credit
      Agreement are hereby amended as follows:

      a.    The definition of "Availability" is hereby deleted in its entirety
            and the following substituted in its stead.

                  "Availability" means, at any time of determination, (i) except
                  as provided in clause (ii) below, (A) prior to January 7,
                  2005, $200,000,000, and (B) on and after January 7, 2005, an
                  amount equal to the difference between the amounts on deposit
                  in the Cash Collateral Account and 100.5% of the Letter of
                  Credit Outstandings, or (ii) if the Inventory Collateral
                  Election Effective

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                  Date has occurred, the difference between the Borrowing Base
                  and 100.5% of the Letter of Credit Outstandings.

      b.    The definition of "Collateral" is hereby deleted in its entirety and
            the following substituted in its stead:

            "Collateral" means (i) the Mortgaged Property, (ii) any and all
            "Collateral" as defined in the Pledge and Security Agreement, and
            (iii) if the Inventory Collateral Election Effective Date has
            occurred, all Inventory and the proceeds thereof.

      c.    The definition of "Credit Documents" is hereby deleted in its
            entirety and the following substituted in its stead:

            "Credit Documents" means this Agreement, the Letters of Credit, each
            letter of credit application, the Mortgage, the Pledge and Security
            Agreement, and, if the Inventory Collateral Election Effective Date
            has occurred, the Security Agreement, and any other instrument or
            agreement now or hereafter executed and delivered in connection
            herewith or therewith, each as amended and in effect from time to
            time.

      d.    The definition of "Security Documents" is hereby deleted in its
            entirety and the following substituted in its stead:

            "Security Documents" means the Pledge and Security Agreement, the
            Mortgage, and, if the Inventory Collateral Election Effective Date
            occurs, the Security Agreement.

      e.    The definition of "Unused Commitment" is hereby deleted in its
            entirety and the following substituted in its stead:

            "Unused Commitment" shall mean, on any day, (a) (i) the balance in
            the Cash Collateral Account divided by 100.5% minus (ii) the then
            Letter of Credit Outstandings, or (b) if the Inventory Collateral
            Election Effective Date has occurred, (i) the Commitment minus (ii)
            the then Letter of Credit Outstandings.

      f.    The following new definitions are hereby added in appropriate
            alphabetical order:

            i.    "Borrowing Base" shall mean the result of (i) the lesser of
                  (A) a percentage of the cost of Inventory, such percentage to
                  be determined upon completion of due diligence by the Issuing
                  Banks after receipt of an Inventory Election Notice from
                  Kmart, and (B) a percentage of the appraised liquidation value
                  of Inventory, such percentage to be determined

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                  upon completion of due diligence by the Issuing Banks after
                  receipt of an Inventory Election Notice from Kmart, minus (ii)
                  such reserves (including, without limitation on account of
                  Permitted Liens) as the Issuing Banks may establish from time
                  to time in their reasonable credit judgment, upon ten days
                  notice to Kmart (other than the initial Reserves which may be
                  established on the Inventory Collateral Election Effective
                  Date without furnishing such ten days notice).

            ii.   "Inventory" shall have the meaning given that term in the UCC,
                  including, without limitation, all: (a) goods which are held
                  by Kmart for sale or lease or to be furnished under a contract
                  of service, (b) goods which consist of raw materials, work in
                  process, or materials used or consumed in Kmart's business;
                  (c) goods of said description in transit; and (d) documents
                  which represent any of the foregoing.

            iii.  "Inventory Collateral Election Effective Date" shall mean the
                  date upon which each of the following conditions have been
                  satisfied:

                  a)    The Issuing Banks have received an Inventory Election
                        Notice from Kmart.

                  b)    The Issuing Banks have received the results of a
                        commercial finance examination of Kmart and its
                        subsidiaries, an appraisal of the Inventory, and other
                        due diligence, undertaken by such Persons and with
                        results as are reasonably satisfactory to the Issuing
                        Banks.

                  c)    The Issuing Banks shall have entered into an
                        intercreditor agreement with the agent under the
                        Existing Financing Agreement (or any holder of
                        replacement financing therefor) on terms reasonably
                        acceptable to the Issuing Banks, if at the time of the
                        Inventory Collateral Election Effective Date, the
                        Existing Financing Agreement (or any replacement
                        therefor) continues to be in force and effect.

                  d)    The Issuing Banks shall have received the duly executed
                        Security Agreement from Kmart.

                  e)    All documents and instruments, including Uniform
                        Commercial Code financing statements, required by law or
                        reasonably requested by the Issuing Banks to be filed,
                        registered or recorded to create or perfect the liens
                        intended to be created under the Security Agreement and
                        all such documents and instruments shall have been so
                        filed, registered or recorded to the satisfaction of the
                        Issuing Banks. The liens of the Issuing Banks in the
                        Inventory

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                        shall be subject only to (i) Permitted Liens, and (ii)
                        to the extent the Existing Financing Agreement (or any
                        replacement therefor) continues to be in force and
                        effect on the Inventory Collateral Election Effective
                        Date, the liens of the agent under the Existing
                        Financing Agreement (or of any holder of replacement
                        financing therefor).

                  f)    The Issuing Banks shall have received a favorable
                        written opinion of Kmart's counsel covering such matters
                        as the Issuing Banks shall reasonably request.

                  g)    The Issuing Banks shall have received evidence
                        satisfactory to it that the Inventory is insured in such
                        amounts and against such casualties and contingencies as
                        the Issuing Banks shall reasonably require.

                  h)    The Issuing Banks (or their counsel) shall have received
                        from each party hereto such other instruments documents
                        and agreements as the Issuing Banks may reasonably
                        require, including, without limitation, such further
                        amendments to this Agreement as the Issuing Banks
                        reasonably determine are necessary to insure a
                        successful syndication of the credit facility
                        established hereunder.

                  i)    Kmart shall have provided to the Issuing Banks its
                        calculation of the Borrowing Base, which calculation
                        shall be acceptable to the Issuing Banks in their
                        reasonable discretion.

            iv.   "Inventory Election Notice" shall mean written notice from
                  Kmart to the Issuing Banks indicating that Kmart desires to
                  grant a lien on its Inventory as substitute collateral for all
                  or any portion of the amount on deposit in the Cash Collateral
                  Account.

            v.    "LIBOR" means on any day of calculation, the rate appearing on
                  Page 3750 of the Telerate Service (or on any successor or
                  substitute page of such Service, or any successor to or
                  substitute for such Service, providing rate quotations
                  comparable to those currently provided on such page of such
                  Service, as determined by the Issuing Banks from time to time
                  for purposes of providing quotations of interest rates
                  applicable to dollar deposits in the London interbank market)
                  at approximately 11:00 a.m., London time, as the rate for
                  dollar deposits with a maturity comparable to the expiry of
                  such Letter of Credit. In the event that such rate is not
                  available at such time for any reason, then the "LIBOR Rate"
                  shall be the rate at which dollar deposits and for a maturity
                  comparable to expiry of

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                  such Letter of Credit are offered by the principal London
                  office of the Issuing Banks in immediately available funds in
                  the London interbank market at approximately 11:00 a.m.,
                  London time.

            vi.   "Permitted Liens" means the following Liens: (a) Liens for
                  taxes or assessments or other governmental charges not yet due
                  and payable, (b) carriers', warehousemen's or other similar
                  possessory Liens arising by operation of law in the ordinary
                  course of business, (c) landlords' Liens arising in the
                  ordinary course of business, (d) materialmen's and mechanics'
                  Liens arising in the ordinary course of business, (e) any
                  attachment or judgment Lien not constituting or relating to an
                  Event of Default under Section 7.01(l), (f) consignments and
                  claims under the Perishable Agricultural Commodities Act of
                  1930 and the Packers and Stockyard Act of 1921, (g) claims in
                  favor of the appropriate governmental authorities on the
                  proceeds from sales or services relating to hunting and
                  fishing licenses and/or the sale of lottery tickets, and (h)
                  claims in favor of Western Union in respect of proceeds from
                  sales or services with respect to money transfers through
                  Western Union.

            vii.  "Security Agreement" shall mean a security agreement granting
                  the Issuing Banks a lien on Kmart's Inventory and the proceeds
                  thereof to secure the Obligations, containing such
                  representations and covenants and otherwise reasonably
                  satisfactory in form and substance to the Issuing Banks.

3.    Amendments to Article 2. The provisions of Section 2.08 of the Credit
      Agreement are hereby amended by deleting clauses (a)(i) and (a)(ii) and
      substituting the following in their stead:

            i.    Standby Letters of Credit: At a per annum rate equal to 0.20%
                  unless the Inventory Election Effective Date has occurred, in
                  which event at a per annum rate equal to LIBOR plus 3.00%.

            ii.   Commercial Letters of Credit: At a per annum rate equal to 0%
                  unless the Inventory Election Effective Date has occurred, in
                  which event at a per annum rate equal to LIBOR plus 3.00%.

4.    Amendments to Article 5. The provisions of Article 5 of the Credit
      Agreement are hereby amended as follows:

      a.    The provisions of Sections 5.05 and 5.06 are hereby amended by
            adding the following at the beginning thereof:

            Subject to the provisions of Section 5.11 hereof,

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      b.    The following new Section is added at the end of Article 5:

            5.11 Inventory Collateral Effective Date. Upon the occurrence of the
      Inventory Collateral Effective Date, the provisions of Sections 5.05 and
      5.06 shall no longer be applicable.

5.    Conditions to Effectiveness. This First Amendment shall not be effective
      until each of the following conditions precedent have been fulfilled to
      the satisfaction of the Issuing Banks:

      a.    This First Amendment shall have been duly executed and delivered by
            the Kmart and the Issuing Banks.

      b.    All action on the part of Kmart necessary for the valid execution,
            delivery and performance by Kmart of this First Amendment shall have
            been duly and effectively taken.

      c.    Kmart shall reimburse the Issuing Banks for all expenses incurred by
            the Issuing Banks in connection herewith, including, without
            limitation, reasonable attorneys' fees.

      d.    No Default or Event of Default shall have occurred and be
            continuing.

6.    Miscellaneous.

      a.    Except as provided herein, all terms and conditions of the Credit
            Agreement and the other Credit Documents remain in full force and
            effect. Kmart hereby ratifies, confirms, and reaffirms all of the
            representations, warranties and covenants therein contained.

      b.    This First Amendment may be executed in several counterparts and by
            each party on a separate counterpart, each of which when so executed
            and delivered, each shall be an original, and all of which together
            shall constitute one instrument. Delivery of an executed counterpart
            of a signature page hereto by telecopy shall be effective as
            delivery of a manually executed counterpart hereof.

      c.    This First Amendment expresses the entire understanding of the
            parties with respect to the matters set forth herein and supersedes
            all prior discussions or negotiations hereon.

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      IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed and their seals to be hereto affixed as the date first above
written.

                                      KMART CORPORATION

                                      By___________________________________
                                      Print Name:__________________________
                                      Title:_______________________________

                                      FLEET NATIONAL BANK

                                      By___________________________________
                                      Print Name:__________________________
                                      Title:_______________________________

                                      BANK OF AMERICA, NATIONAL ASSOCIATION

                                      By___________________________________
                                      Print Name:__________________________
                                      Title:_______________________________

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