The lack of store-thronging hits and a growing consumer hunger for bargains are taking a frightful toll in toyland this season.
Less than three weeks after the parent of the famed FAO Schwarz filed for bankruptcy protection, KB Toys Inc. is in distress. After days of rumors, the toy retailer has confirmed it has held off making its December payment to its toy and videogame suppliers, both for its stores as well as its online operation because of slack sales. The company also said it is assessing its cash position and prospects for the coming year, prompting some analysts to predict a retrenchment and store closings.
In an interview, KB Toys' chief executive, Michael Glazer, said "a slower-than-expected holiday shopping season" prompted the move and that KB is "in communications with its key vendors about the decision." Spokesmen for KB suppliers, Hasbro Inc. and Mattel Inc., couldn't be reached for comment.
Glazer added that the company still has "a significant amount" of borrowing power under a revolving credit line with a core group of lenders led by a unit of FleetBoston Financial Corp. That credit line, say people familiar with the matter, totals about $100 million. Speculation about a possible filing for bankruptcy protection is "way too premature at this point," Glazer said.
Glazer declined to discuss how much KB owes its vendors. KB rings up much of its sales — which were $1.7 billion last year — during the holiday season and typically uses cash-register receipts to make a large payment to suppliers in December, due this year on Dec. 12.
However, an unusually early price war — initiated, retailers say, by Wal-Mart Stores Inc. in late September — cut deeply into KB's subsequent sales, and it held off on making the payment. Although, as with other sellers, KB carries more exclusive toys to blunt the fierce competition on standard items, the retailer still competes against Wal-Mart and other big discounters on nearly 60 percent of its toys and videogames.
"We were having a pretty decent year until September," Glazer said. "But the last three months have been one of the worst we've seen in recent years."
In fact, toy sales across the board have been weak this holiday season, although Visa, the credit card company, said Friday and Saturday retail sales of all sorts made on its plastic rose 8.7 percent to $3.7 billion from the same period a year ago.
Soft sales and fierce price competition also were cited by FAO Inc. at the time of its recent Chapter 11 filing — its second this year. And last month, in reporting a wider-than-expected third-quarter loss, Toys R Us Inc. also blamed price-slashing by competitors for its ills.
KB, of Pittsfield, Mass., is closely held and controlled by Bain Capital, a Boston buyout firm. Most of its 1,300 stores are based in malls, and it has tried to stay out of Wal-Mart's firing line by catering to "impulse shoppers," mothers promising a well-behaved child a reward while she shops, or a grandmother needing a birthday present in a hurry.
Not only has the retailer suffered from the growing trend of children shifting their attention to computer and video-based games at increasingly earlier ages, but it also has counted on shoppers hunting for Tickle Me Elmo and other past Christmas crazes to drum up traffic during the holiday season. With no big must-have toy emerging this year, toy shoppers have been hunting for bargains, driving traffic away from the toy-specialty stores toward Wal-Mart and other large discount chains — some of which sell toys at a loss to generate traffic for their other merchandise.
To stay competitive with the discount chains, KB has recently begun offering 10 percent to 50 percent off on the vast majority of its toys.
At a KB Toys store at the South Shore Shopping Plaza in Braintree, Mass., this weekend, the strategy was packing them in. At 8 p.m. Saturday night the aisles were jammed with customers and the line at the cash register was about 10 minutes long. "Why is the line so long?" asked Cheryl Lively, a 34-year-old mother from nearby Randolph, Mass. "Because you can't beat the prices," replied Maria Garotto, a Milton, Mass., mom also standing in line. A few other shoppers nodded in agreement.
Some of the discounts appeared to be hastily put up, on 8 1/2-by-11 typing paper with the words, "Holy Cow . . . Priced to Moooo . . . ve." The store's entire Lego selection, for example, was marked down 20 percent. The price on Bratz's Formal Funk Super Styling Runway Disco was slashed to $59.99 from $99.99. Another Bratz toy, Formal Funk E.M. Limo, was selling for $49.99, down from $79.99. And an elaborate Harry Potter Hogwart's School Deluxe Electronic Playset that normally sells for $59.99 was going for $24.99.
"You would think it was Christmas or something," Garotto joked, to calm her restless 5-year-old son.
KB's woes may be giving Bain Capital, which acquired its majority stake three years ago, second thoughts about competing in an increasingly cutthroat market. Bain paid $300 million for its share of KB from then-parent Consolidated Stores Inc., and has provided a variety of support services since. KB management also has substantial stake in the company.
Some analysts are wondering why Bain isn't coming up with the cash to pay vendors now, especially in light of the black mark KB Toys could get as a result of skipping a payment.
Officials at Bain didn't return repeated phone calls seeking comment.
John Taylor, an analyst for Arcadia Investment Inc. who has been talking to many of KB's vendors, expects a downsizing and redirection of the chain that could shutter about 100 poorer-performing stores. KB already closed 50 to 60 less-profitable stores last year, and plans to shut a similar number this year, Glazer said. And, as part of a cost-cutting move, the company trimmed 10 percent of its corporate staff this past spring.
"Bain has been a great partner in helping us manage the business in a very difficult toy retail environment," Glazer said. "They've been very supportive from an operations and strategic standpoint." Last year, Bain provided advice as KB mortgaged some of its warehouse and distribution centers to raise additional funds.
Also, last month KB named as its chief operating officer William L. McMahon, a former Bain executive. Prior to joining KB in March, as an executive vice president, McMahon was president and chief executive of Decorative Concepts Inc. Previously he held various positions at Bain, including that of executive vice president. As chief operating officer, McMahon will have responsibility for merchandising and operational functions of all KB Toys retail channels.
Bain is no stranger to retailing. In the past the firm has invested in numerous retail outfits including office supplies superstore Staples Inc., Brookstone Inc. and Sports Authority.
In their reassessment of the chain, Glazer said Bain and KB management plan to scrutinize its merchandising mix with the possibility of adding more exclusive and educationally oriented toys, in apparent effort to fill void left by FAO and its shuttered Zany Brainy chain. Currently about 20 percent of its toy offerings are exclusives and another 20 percent are last year's closeouts.