It is a depressing sign of the times that a major toy retail chain is going out of business before, not after, the holidays.  KB Toys filed for Chapter 11 bankruptcy for the second time in four years, and indicated that it plans to conduct liquidation sales at all of its outlets commencing immediately.  The company, which has been in business for 86 years, blames a sudden and sharp decline in consumer sales resulting from poor overall economic conditions.

Retailers in the always competitive toy business were expecting a very tough holiday season and led by Wal-Mart they reacted in early October with steep price cuts (see “KB, Target Respond to Wal-Mart”).  KB offered 200 or more toys for $10 and instigated “Buy 2, Get 1 Free” programs with new items added weekly.  But all the price cutting proved to be of no avail—in its filing KB indicated that same store sales from October 5th through December 8th were down a disastrous 20%.  The company has decided that the best way to satisfy its creditors is by liquidating its stores via immediate going-out-of-business sales.

The KB Toy chain, which is based in Pittsfield, Massachusetts and 90% owned by the private equity group Prentice Capital Management, consists of 277 mall stores, 40 slightly larger KB Toy Works stores, which are typically located in strip malls, 114 “outlet” stores, and 30 temporary “holiday stores.”

In 2004, prior to its original bankruptcy filing the KB Toys chain had included as many as 1,200 stores (see “150 KB Stores Closing”).  During its first 2004 bankruptcy filing KB was owned by another private equity company Bain Capital Partners (made famous by Mitt Romney).  As the Wall St. Journal points out Bain was accused “of improperly draining cash from the company in a dividend recapitalization deal.”  Two lawsuits arising from Bain’s handling of the first KB Chapter 11 filing were settled out of court and the terms were never disclosed.  An affiliate of the Prentice Capital Management group purchased what was left of the KB chain after the “cleansing” of the 2004 bankruptcy for $20 million.