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KB Toys Files for Bankruptcy Protection

AP
Thursday, 11 Dec 2008 | 3:08 PM ET

In another sign of the grim holiday season, KB Toys filed for bankruptcy protection for the second time in four years on Thursday, joining fellow retailers Linens 'n Things and Steve & Barry's in seeking Chapter 11 protection amid the recession.

The retailer said in its filing in U.S. Bankruptcy Court in Delaware that it had debts between $100 million and $500 million and total assets in the same range.

That a toy retailer filed for bankruptcy just before Christmas shows how bleak things have become, since they make up to half of their sales during the holidays. But analysts expect toy sales this holiday season to either be flat or down slightly from last year, when they totaled $10.4 billion, according to market research firm NPD Group, because consumers are cutting back. In response, toy retailers have 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, to include video games and DVD movies.

But the company's debt overwhelmed its efforts. Vendors top KB Toys' 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 and the maker of Legos.

KB Toys did not immediately return a call for comment.

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.

The more than 80-year-old company operates 460 stores.

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, The Sharper Image, Steve & Barry's, to Linens 'N Things and Circuit City Stores.

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