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KB Toys, citing bleak sales, files for bankruptcy again

Industry observers aren't surprised. The chain plans to start closing stores soon.

December 12, 2008|Andrea Chang and Mark Medina | Chang and Medina are Times staff writers.

Holiday-related bankruptcies got an early start Thursday -- just two weeks before Christmas -- when KB Toys Inc. filed for Chapter 11 and said it planned to hold liquidation sales in the coming weeks.

Citing a rapid drop in sales during the crucial holiday shopping season, the retailer joined major chains such as Circuit City Stores Inc., Linens 'n Things Inc. and Mervyn's in seeking bankruptcy protection in recent months.

Retail experts have been predicting a wave of bankruptcies and an exodus of merchants from the nation's shopping malls after the new year.

It was the second time in four years that KB Toys had filed for bankruptcy. The announcement came at a time when toy merchants have been scrambling to offer bargains in the hopes of boosting business during one of the toughest holiday seasons in decades.

Like other retailers, KB Toys has slashed prices and offered special deals to drive sales. On Black Friday, the retailer opened many of its stores at midnight to get a jump-start on its competitors.

But the efforts fell short: In its filing, KB Toys reported that between Oct. 5 and Dec. 8, comparable-store sales, a key measure of retail health, fell 20% from a year earlier.

KB Toys' collapse came as a surprise to shoppers, but it was all but expected among retail experts, who said the company's departure wouldn't cause a huge shake-up in the industry.

"It was literally a question of when" KB Toys would file for bankruptcy again, said Sean McGowan, a toy analyst with Needham & Co. "To put it into perspective, they probably only have less than 2% of total industry sales."

At the KB Toys store in the Glendale Galleria on Thursday, sale signs were everywhere and shoppers said they were disappointed to see yet another well-known retailer fold.

"That's too bad -- they've been around for a long time," said Aileen Grigorian, 35, of Sunland. "Around Christmastime, people count on toy stores."

McGowan said KB Toys, which shuttered hundreds of stores during its 2004 bankruptcy, has run into stiff competition in recent years from major chains such as Wal-Mart Stores Inc., Target Corp. and Toys R Us Inc.

Another problem for the 86-year-old company, he said, is its primarily mall-based locations. With mall traffic way down lately as consumers cut their expenses, KB Toys has struggled to attract shoppers.

"Ever since they emerged, there have been questions about the long-term survivability of the format," McGowan said. "Lay on that a bad economy, and there was just no way they were going to make it."

KB Toys, based in Pittsfield, Mass., listed assets of $100 million to $500 million in the petition filed in U.S. Bankruptcy Court in Delaware. The company reported liabilities in the same range.

In the filing, Raymond Borst, vice president and controller of KB Toys, said the company pursued other options before filing for bankruptcy, but "none of those potential alternatives . . . proved to be viable."

"Thus, it became apparent that the liquidation of their retail-based operations through expedited and orderly going-out-of-business sales within Chapter 11 was the best option," Borst wrote.

It was not immediately clear why the company filed for Chapter 11 if it intended to close its stores.

Privately held KB Toys operates roughly 460 retail stores, including outlet locations. Calls to KB Toys headquarters were not returned Thursday.

Although Borst wrote that the company had been suffering from weak sales for months, employees at KB Toys stores in Southern California said they were caught off guard.

Veronica Hernandez, a sales associate at the KB Toys in the Burbank Town Center, said she found out about the filing from a store manager Thursday.

"It's actually pretty devastating," she said. "I just started working here and I'm like, 'Oh my God, it's already over?' " Hernandez said employees had been told that the store would close by early next year.

Borst recommended in the filing that liquidation sales begin quickly to prevent the company from losing more money. "Time is of the essence to commence the store closing sales," he wrote. "If the debtors cannot commence the store closing sales during the last two weeks of the holiday selling season, the debtors estimate that several million dollars in value will be lost."

After learning of the bankruptcy, Ofelia Cruthirds went to the KB Toys in Glendale, "thinking the bankruptcy would mean the prices would be lower."

At the store, large red-and-green banners announced "blowout sale -- up to 60% off." Among the many discounts: buy-two-get-one-free Hannah Montana dolls and Nerf guns.

Despite the numerous bargains, Cruthirds, a business consultant from Fontana, said she planned to go to Wal-Mart and Kmart to compare prices.

Gerrick Johnson, a toy analyst with BMO Capital Markets, said the bigger players have made it difficult for KB Toys to remain relevant.

"KB's significance in the toy world has dropped off," Johnson said. "The channel is changing from dedicated toy retailers and specialty toy retailers to mass market discounters, and this is just another step in that evolution."

He said the company's troubles also showed that the toy industry was not immune from the recession. "Toys are recession-resistant; they're not recession-proof," he said. "As parents cut across the board, kids get cut back on too."


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