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More joys for holiday toys

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Toy retailing is likely to bring joy to more than children this holiday shopping season.

Wal-Mart, No. 1 seller of toys and the industry's price leader, is expected to cut competitors some slack by not maintaining such cut-throat pricing as last year.

Its aggressive "loss leader" pricing on popular toys last year lured millions of consumers from traditional toy stores. While it recouped some of the margins from sales of other products in its massive selection, stalwarts Toys R Us, KB Toys and FAO Schwarz were critically wounded. Now it believes it doesn't need to cut as much.

"Wal-Mart felt they left money on the table by cutting prices deeper than they needed to in order to get the sale," says Sean McGowan, analyst at Harris Nesbitt. "So this year, while they will be the lowest priced and very promotional, they may, for example, be only a $1 less than Toys R Us rather than $5 less on some items."

The Bentonville, Ark.-based discount giant declined comment beyond affirming its commitment to its "everyday low prices."

"We will continue to focus on bringing value to our customers throughout the entire store," spokeswoman Sharon Weber says.

Half of all toy sales take place during the holiday. The industry is expected to finish flat to slightly down this year at about $20 billion for traditional toys and an additional $5 billion for video games.

So Wayne, N.J.-based Toys R Us, the second-biggest toy seller, can only hope for easing price rivalry. It took a drubbing last year from Wal-Mart and rival discounter Target (whose heavy toy promotions to carve out a place in the business helped push Wal-Mart's pricing strategy).

Toys R Us recently announced that it may leave the toy business if its prospects don't improve. On the heels of shuttering its Kids R Us stores and educational toy chain Imaginarium, the chain now is using sharp discounts to thin excess inventory. And it has already begun its holiday appeal with newspaper inserts advertising new items, discounts and gift cards.

"We'll have great products, lots of exclusives, fantastic value and a great store experience," says Ray Arthur, CFO of Toys R Us.

That enthusiasm must infect consumers if Toys R Us, the last specialty toy retailer standing firm, is to remain.

Former contender FAO Schwarz (parent of Zany Brainy) buckled under the pricing pressure from discount chains and liquidated as last holiday season drew to a close. KB Toys operates significantly fewer stores now under bankruptcy protection.

"Since this time last year, the toy industry has lost nearly 500 dedicated toy retailing stores," McGowan adds.

That would seem to improve prospects for Toys R Us to snag consumers who want to dodge long lines at discount stores or those who seek more than Teen Titans, Bratz and Star Wars top sellers in those stores' more limited lineups.

But analysts say Toys R Us may need more ideas, such as unique gift card options and co-op branding with other retailers to survive.

"It's time for Toys R Us to think outside the box," says Dhruv Grewal, professor of marketing and retail at Babson College. "It needs to expand the categories it carries so that there are several discretionary things for people to buy at one time, including books, music, video games and DVDs."

But challenges remain industrywide:No buzz. No toy has emerged as a "must have" to boost the $20 billion industry, raising the specter of another holiday season of flat to slightly lower sales. If so, it would mark the industry's fourth consecutive year of poor performance.

"Sales will be down 2 percent to 4 percent for the year at about $19.4 billion compared with $19.8 billion last year," says Anthony Gikas, retail analyst at Piper Jaffray. "Through June, sales were down 4 percent vs. down 2 percent in the period a year ago."

A bright spot in traditional toys, however, is the plush category's return of Cabbage Patch Kids.

"There's an opportunity in the market where there hasn't been a lot of real sexy product releases, and there's always kids in the age range for plush toys," Gikas says.

E-cannibalization. Kids are getting older younger. They're playing video games at a younger age and getting onto computers at a younger age.

Because kids are attracted to electronic toys earlier, the video game sector is growing fastest, cannibalizing some sales from traditional toys.

This year, the video game sector is due to have a very strong December with the release of high-profile products for the holiday, including Grand Theft Auto San Andreas, the latest in the popular series.

Sales of video game software are expected to rise 8 percent this year to $6.3 billion compared with a gain of 5 percent a year ago when sales were $5.8 billion, Gikas says.

The economy. Consumers are already cautious with every penny. Even discount giant Wal-Mart is not overly confident about the general climate of spending as surging oil prices continue to depress discretionary spending.

"Whether the economy, election or war in Iraq, consumer confidence and outlook are shaky. It looks like it's going to be a tough go," says Gary Ruffing, head of the Retail Services Group at management consulting firm BBK.