They couldn’t hang on two more weeks.
Just 14 days ahead of the biggest day on the retail calendar, KB Toys filed for bankruptcy and planned to start going-out-of-business sales right away, choked by a downturn so severe that sales were down 20 percent in what should have been its busiest season.
Desperate to pull in shoppers, the company touted “Buy 2, Get 1 Free” sale on name brands like Playskool and Littlest Pet Shop, $25 off Mattel and Fisher-Price toys and other sharp discounts in ads distributed Thursday before the company filed for Chapter 11 protection.
But the “blowout” sales turned into liquidation sales, as the company filed for bankruptcy protection for the second time in four years, unable to offset the “sudden and sharp decline in consumer sales” it had seen in the past two months.
“Manufacturers were concerned about shipping to them over the last couple of months,” said Jim Silver, a toy analyst at timetoplaymag.com. “This did not happen all of a sudden.”
He said that the timing of the filing was a surprise; he expected it in January.
That a toy retailer filed for bankruptcy just before Christmas shows how bleak things have become, as KB Toys joins a growing list of retailers in bankruptcy, including Mervyns LLC, The Sharper Image, Steve & Barry’s, Linens ’N Things and Circuit City Stores Inc.
While the toy sector is faring better than other segments of retail such as apparel and home furnishings, it has seen sales slow compared to last year’s levels. Analysts expect toy sales this holiday season to be flat or down slightly from what market research firm NPD Group said was last year’s total of $10.4 billion.
In response, toy retailers 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.
Still, in the filing in U.S. Bankruptcy Court in Delaware, the company said that between Oct. 5 and Dec. 8, sales in stores open at least one year fell nearly 20 percent. That’s an aberration for toy stores, which usually make up to half of their sales during the holidays.
Silver said that as manufacturers balked at shipping “hot” holiday items to KB 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.”
The 86-year-old 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.
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 Pittsfield, Mass.-based 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.
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.
Silver said KB had been struggling since emerging from its first bankruptcy protection in 2005.