Busted Toy Sales

Of all places to ooze holiday magic, one would think toy retailers, but this season was a remarkable exception. Now, it seems we've been left with a few busted toy retailers. In an echo of FAO (OTC: FAOOQ), privately held KB Toys said today that it has filed for Chapter 11 bankruptcy protection after soft holiday sales and steep competition.

Despite moves like widespread KB toy areas in Sears (NYSE: S  ) stores (Sears' way to copy the big discounters' model), it still wasn't enough to save the season for the mall-based toy retailer. And many of us probably expected a turn for the worst after KB said it couldn't pay its creditors several weeks ago.

It wasn't just the cutthroat, cut-price influence of discounters Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) that put toy retailers in "time out." After all, FAO's bankruptcy resulted in clearance sales that undoubtedly attracted brisk shopping (too little, too late, of course). It seems there's nothing like tough times to make it tougher for everybody.

Meanwhile, even Toys "R" Us (NYSE: TOY  ) , the former king of toyland, is also feeling some pain. It shuttered its Kids "R" Us stores, and last week, was forced to lower its earnings projections after same-store sales fizzled out during the holidays.

Although the playground seems to be emptying out due to the bullying influences of Wal-Mart and Target, it seems the real challenge for the toy experts right now is to find the niches that surely need to be filled.

In fact, Rick Munarriz came up with some excellent ideas for Toys "R" Us recently, making the point that the selection of toys at venues like Wal-Mart and Target may be easy on the pocketbook, but nothing's fun or special about the merchandise or the experience. Indeed, the thought of a world where toys purchased from Wal-Mart or Target is as special as it gets is a depressing one.

KB expects to have emerged from bankruptcy by the time the next holiday season rolls around, after closing unprofitable stores, reducing employees, and taking other cost-cutting measures, according to news reports. Hopefully KB and other toy retailers are putting on their thinking caps -- it's time to come up with some winning strategies to get themselves back in the game.

Talk about Wal-Mart's hold on the toy chest on the Wal-Mart discussion board.

Alyce Lomax welcomes your feedback at alomax@fool.com.