Holiday outlook grim for toy retailers

By Lorrie Grant
USA Today

Toys "R" Us yesterday reported a loss of almost $40 million in its third quarter. The toy retailer will close all 146 of its freestanding clothing stores and its 36 Imaginarium stores. Associated Press

Competition from discount stores and consumer electronics chains that sell popular video games is shaking up the $21 billion toy market.

"Combine the fact that discounters are convenient and their pricing better, then it's a hard battle," says Todd Kuhrt, a toy retail analyst at FTN Midwest Research.

Toys "R" Us lost $38 million in the third quarter, a 35 percent bigger loss than a year ago.

The company plans to close its money-losing Kids R Us clothing stores and Imaginarium stores. Sales were flat at $2.3 billion.

Toys "R" Us is one of the few companies that has continued to lose money all year, even "as the retail environment has improved," says Matthew Fassler, a toy analyst at Goldman Sachs.

FAO Schwarz, the upscale specialty toy retailer that emerged from bankruptcy protection earlier this year, announced last week that it is in default with lenders and may shutter stores.

KB Toys stores, which are based in malls, have suffered from the drop in traffic as more consumers choose the convenience of non-mall stores, such as discount and consumer electronics chains.

About half of all toy sales occur during the critical holiday shopping season.

That means huge demand is needed during the four- to six-week shopping period if toy retailers are going to thrive. But without any wildly popular toys to reel in shoppers, consumers are likely to go where they can get a bargain price.

"The absence of a hot toy is the difference between a toy store having a 30 percent increase" or none, says Britt Beemer, founder of consumer behavior research firm America's Research Group.