Turbulent times for toys and sports: DIY steers clear of downturn

DSN Retailing Today, July 5, 2004 by Debbie Howell

Performance in hardlines for broadline and specialty retailers was a mixed bag this past year, with some categories booming while others suffered changes in consumer preferences and market share, leading in some cases to industry upheaval.

The hardest hit segment was toys, with industry sales down 3% in 2003 related to sales shifting from traditional toys to electronic games. In addition, toy specialists went through a major shakeout under pressure from mass merchants selling toys at prices the specialists couldn't match. The price war led to two bankruptcy filings, the liquidation of several chains and the closing of hundreds of stores.

Toys "R" Us closed all 146 of its Kids "R" Us stores and its 37-store Imaginarium chain this year following a fourth quarter in which same-store sales fell 4.9%. As of mid-June, the chain was formulating a strategy for its 681 U.S. toy stores that could involve more closings, though most analysts believe Toys "R" Us will retain its current store count and expand its Babies "R" Us division. Revenue for Toys "R" Us, the leading specialist, declined 4% to $6.47 billion in its core domestic Toys "R" Us stores, while most suspect that Wal-Mart's volume grew.

KB Toys hit the skids in January when it filed for Ch. 11 and closed 400 of its 1,240 stores this year. It looks to emerge from bankruptcy later this year.

Also filing for bankruptcy was FAO Inc., which threw in the towel in January when it liquidated its 89-store Zany Brainy chain and closed all its stores except two FAO Schwarz flagships in New York City and Las Vegas. Those stores were purchased by buyout firm D.E. Shaw in March and will be reopened this year under the FAO Schwarz banner.

The toy business wasn't a total bust for every retailer, however, especially for WalMart, considered the nation's top seller of toys. Largely through aggressive growth of supercenters and expansion into niche categories such as educational toys, WalMart's share keeps rising. Target also is growing its toy business, with some experts speculating that the retailer is now the No. 2 toy retailer, having possibly surpassed the $6.47 billion generated by Toys "R" Us in the United States.

Almost the opposite trend occurred in home improvement retailing. Sales leader The Home Depot reported sales rising 11% to $64.8 billion, while No. 2 player Lowe's grew revenue 18% to $30.8 billion.

As opposed to the dominance of WalMart in toys, Home Depot and Lowe's are the top sellers of hardware, largely due to broader assortments and expertise. Both Target and Kmart have scaled back traditional DIY categories, in part because of the growing expertise and execution in the home center channel, including privately owned Menards.

While discounters and clubs offer a cherry-picked hardware department as a customer convenience, for home centers and hardware stores the strategy has been to excel at deep selections, along with adding services. The growth of specialized formats or niches has been a trend among specialists this past year, from Home Depot's test of smaller urban-store formats to Lowe's expanding special order.

Both Lowe's and Depot are aggressively pursuing service-oriented, special order and pro-targeted businesses in addition to their core DIY consumer market. In addition, a trend to make these female-friendly has changed the merchandise mix, with more home decor items, and store environments being reworked with more visually appealing displays.

Sears occupies a unique positioning in hardware, with its strong Craftsman tool brand. The retailer has ditched some money-losing hardware categories while offering a wider brand assortment in its "Tool Territory" department.

Meanwhile, competition heated up in sporting goods, with leading companies producing a solid performance and setting the stage for further growth. Several major developments stand out, but none was more significant than the August 2003 merger between Gart Sports and The Sports Authority.

The deal created the industry's largest full-line company and gave the sporting goods industry its first truly national chain. As those two companies sought to integrate their operations, Dick's Sporting Goods maintained the aggressive expansion program embarked upon nearly two years earlier when it became a public company. Aside from Dick's adding 22 stores last year and opening 25 stores this year, it also acquired Galyans just last month. Dick's is not alone in its quest for new store growth. The sporting goods channel is now awash with public companies following public stock offerings by four retailers in the past four years.

Conversely, the same three office superstore retailers that have dominated the space for the past five years continued to do with one major change. OfficeMax was acquired by Boise Office Solutions, but the deal was largely transparent to retail customers since the stores continue to operate reader the OfficeMax banner.

Staples and Office Depot and, to a lesser extent, OfficeMax showed a renewed commitment to new store growth with a general trend toward operating stores that tend to smaller than previous versions of their existing prototypes. This is easily the most significant trend in the sector as each company shaves around 4,000 square feet off of existing prototypes thanks to leaner assortments and more efficient distribution systems.