KB Toys decision down to the wire

DSN Retailing Today, April 25, 2005 by Doug Desjardins

PITTSFIELD, MASS. -- Troubled toy retailer KB Toys has until May 15 to come up with a plan to emerge from Chapter 11 bankruptcy, a prospect some analysts say is bleak for the 75-year-old chain.

KB was issued the deadline in March by a bankruptcy judge who said the retailer needs to present a workable plan to emerge from bankruptcy after 14 months under Chapter 11 protection. The court ordered the chain to work on the plan with its main creditors, which include toy giants Hasbro and Mattel.

But even after closing hundreds of stores during the past year, KB doesn't appear to have improved its position in a retail environment that's become even more competitive.

"I can't see them having much of a chance of succeeding," said George Whalin, president of Retail Management Consultants. "They're still a basic toy store that's going head-to-head with Wal-Mart, Target and Toys "R" Us and that's a battle they're never going to win."

KB said as much when it filed for bankruptcy in January 2004, citing a 10% decline in same-store sales in 2003 due mainly to "mass merchants' use of toys as a loss leader during the holiday season and increasing price competition in the market the remainder of the year."

Since then, KB has closed more than 600 of the 1,300 stores it had before its filing. The last time it released a public statement about its business was in October, when it had 780 stores and announced plans to close between 148 and 288 stores by January. And with toy sales relatively flat during the holidays, it's doubtful KB made much progress in improving sales.

"During the holidays last year, they were doing the same ... promotions they were doing the year before when they were giving away a $25 plush when someone made a purchase of $100 or more," said toy industry analyst Chris Byrne. "They're still relying on a model they've been using for years and it's proven not to work."

One scenario that's been floated since March when Toys "R" Us was sold for $6.6 billion has KB Toys being folded into Toys "R" Us as a rebranded mall-based division. The reasoning behind that is that KB Toys' majority shareholder, Bain Capital, is also part of the consortium that's buying Toys "R" Us.

But that's considered a long shot, especially since the new owners of Toys "R" Us will be busy working out a plan for its 685 U.S. toy stores later this year.