Powerful Wal-Mart toys with rivals

Wal-Mart isn’t sharing its toys.

Independent toy retailers are blaming the megadiscounter for the holiday season’s sluggish toy sales as bargain-shoppers headed to Wal-Mart for the best prices.

The disappointing season led to yesterday’s Chapter 11 bankruptcy filing by KB Toys Inc. — about a month after upscale toy retailer FAO Schwarz filed for bankruptcy for the second time in a year. Toys R Us, the largest U.S. toy-store chain, reported mediocre sales during the critical holiday period.

“These guys need to redefine who they are and establish a niche for themselves,” said Andy Moser, senior managing director of GMAC Commercial Finance’s Retail Finance Group. “If they choose to compete with Wal-Mart, it’s not something they are going to win at.”

Pittsfield, Mass.-based KB Toys, which has a 4 percent to 5 percent share of the U.S. toy market, operates more than 1,300 stores.

It listed $507 million in assets and $461 million in debts in its bankruptcy filing. It had about $116 million in outstanding unpaid bills for merchandise. The company slowed payments to its suppliers last month.

A Chapter 11 filing allows a company to reorganize and continue operations while freezing debt payments.

“We have been assured by many of our vendors, landlords and other interested parties that they see an important and continuing role for KB Toys in the retail toy market, and will work with us to achieve approval of the reorganization plan,” Chief Executive Michael L. Glazer said in a statement.

Initially, the company would look to close unprofitable stores, reorganizing its operations and cutting staff, he said.

The 80-year-old company, owned by Bain Capital Inc., said it secured $350 million in financing and expects to emerge from bankruptcy before the 2004 holiday season.

Sales at KB Toys stores have declined about 10 percent from Feb. 2 through Dec. 31, according to the bankruptcy filing.

Last year, KB Toys agreed to refund consumers $3 million to settle a class-action lawsuit that claimed deceptive pricing. The company gave all shoppers a 30 percent discount on purchases for a five-day period in October.

During the critical holiday period, KB Toys, like many toy retailers, could not keep up with the steep price cuts by discounters such as Wal-Mart and Target.

Toys were one of Wal-Mart’s strongest-selling categories over the Christmas season. The world’s largest retailer had slashed prices in October — earlier than in the past — and offered some merchandise below cost.

“Wal-Mart made an effort to dominate business in the toy sector,” Mr. Moser said.

Toy stores scrambled to keep up.

KB Toys dropped prices the final Christmas weekend and Toys R Us cut prices on some of the holiday’s popular toys, but those tactics weren’t enough.

Toy R Us had a rough holiday season with a 4.9 percent drop in same-store sales and a less than 1 percent increase in overall sales. The company said profits would be less than expected for the year.

Mr. Moser warned that to get back on track, KB Toys will have to do more than close underperforming stores, which is a common action among bankrupt retailers.

“They have to adopt a different format,” he said.

• This article is based in part on wire service reports.