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Friday, December 12, 2008

Another one bites the Dust - KB Toys Joins Long list of Companies Filing for Bankruptcy

In another sign of the grim holiday season, KB Toys filed for bankruptcy protection for the second time in four years on Thursday and plans to begin going-out-of business sales at its stores immediately.

The 86-year-old company said in a filing that its debt is "directly attributable to a sudden and sharp decline in consumer sales" because of the poor economy.

That a toy retailer filed for bankruptcy just before Christmas shows how bleak things have become, since such stores make up to half of their sales during the holidays. But analysts expect toy sales this holiday season to be flat or down slightly from last year's total of $10.4 billion, according to market research firm NPD Group, because consumers are cutting back amid the recession.

In response, toy retailers, including KB Toys, amped up their discounts.

KB Toys had aggressively cut prices to entice cash-strapped shoppers, offering hundreds of toys for $10 or less. It also expanded its value program, which offers deals on new items each week, and offered "Buy 2, Get 1 Free" promotions.

But the deals weren't enough. In the filing in U.S. Bankruptcy Court in Delaware, KB Toys said that between Oct. 5 and Dec. 8 sales in stores open at least one year, a key retail metric known as same-store sales, fell nearly 20 percent.

The company said it considered its alternatives and decided the most viable way to cover its debt was to begin liquidating its stores via immediate going-out-of-business sales. KB Toys also plans to sell its wholesale distribution business, according to the filing.

Filing for Chapter 11 protection rather than Chapter 7 liquidation allows a company to retain more control over selling off assets. Under Chapter 7, the court immediately appoints a trustee to take over the case.

KB Toys declined to comment beyond what was in the filing.

The company operates 277 mall-based stores, 40 KB Toy Works stores which are mainly in strip malls, 114 outlet stores and 30 short-term holiday stores. It has 4,400 full-time employees and 6,515 seasonal employees.

KB Toys, which says it has about $480 million in annual sales, said in the filing that it had debts between $100 million and $500 million and total assets in the same range.

Vendors top the list of unsecured creditors. The toy retailer owes Hong Kong-based toy manufacturer Li & Fung about $27.2 million, El Segundo, Calif.-based Mattel Toys $1.3 million and St. Louis-based Energizer Battery more than $728,000. Other creditors are Hasbro Inc. and the maker of Legos.

Pittsfield, Mass.-based KB Toys filed for bankruptcy in 2004 and emerged nearly two years later as a subsidiary of investment firm Prentice Capital Management, which owns 90 percent of the company's common stock. During that bankruptcy, KB sold its retail Internet operation to eToys Direct Inc., cut the number of retail stores from 1,200 to 650 and closed a distribution center.

Jim Silver, a toy analyst at timetoplaymag.com, said KB had been struggling since emerging from its first bankruptcy protection in 2005.

"Manufacturers were concerned about shipping to them over the last couple of months," he said. "This did not happen all of a sudden."

He said that the timing of the filing was a surprise, however, since he expected it in January. But as manufacturers balked at shipping "hot" holiday toys, their sales dropped off. KB Toys also suffered from deciding not to sell video-game consoles such as the Nintendo Wii, one of the few toy items selling well this year, Silver said.

"Their business model didn't work," he said. "They're selling closeouts, today people want the hot toys."

Amid the consumer spending slowdown and recession, KB Toys joins a growing list of retailers filing for bankruptcy protection. Others include Mervyns LLC, The Sharper Image, Steve & Barry's, to Linens 'N Things and Circuit City Stores Inc.

Chinese Toy manufacturer Slumps due to KB Toys announcement

Li & Fung Ltd. slumped the most in six weeks in Hong Kong trading after a U.S. client filed for bankruptcy and the Senate rejected a $14 billion bailout plan for American automakers, threatening a deepening of the recession.

Li & Fung, which supplies toys and clothing to Wal-Mart Inc. and Target Corp., fell 13 percent to close at HK$14.86, the biggest decline since Oct. 31.

More than a dozen U.S. retailers have entered bankruptcy this year as consumers cut spending during a yearlong recession, according to data compiled by Bloomberg. Meanwhile, 1 million jobs may be lost in the U.S., where Li & Fung makes more than 60 percent of its sales, after the bailout plan for automakers was rejected, White House spokeswoman Dana Perino said.

``Everyone is quite negative about the overall economy in the U.S.,'' Jackson Wong, investment manager at Tanrich Securities in Hong Kong, said over the phone from Hong Kong. ``This will hit export companies like Li & Fung as it heavily relies on its exports to the U.S.''

KB Toys Inc. filed for bankruptcy in the U.S., saying it owes Li & Fung $27.2 million.

The Hong Kong-based trader said KB Toys owes it about $5 million. The remaining $22.2 million is owed to factories that supply Li & Fung, the company said.

Sudden Sales Drop

``The KB Toys bankruptcy is certainly one of the reasons for the stock decline,'' Wong said.

KB Toys, the 86-year-old toy retailer based in Pittsfield, Massachusetts, said yesterday it filed for bankruptcy with plans to close its stores because of a ``sudden drop'' in sales in the past two months. This comes three years after KB Toys ended a previous bankruptcy by closing almost half of its 1,200 stores. The chain has shut hundreds more since amid increased competition from Wal-Mart, Toys ``R'' Us Inc. and Target.

``Li & Fung's exposure to the U.S. is quite large,'' Castor Pang, a strategist at Sun Hung Kai Securities Ltd. in Hong Kong, said. ``A lot of companies there have issued profit warnings and more companies may come out with similar news like KB Toys.''

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