It's widely expected that the 2008 holiday season could be hell for all but the strongest retailers. KB Toys is the latest sign of the times now that it's filing for bankruptcy for the second time in a matter of years. This time it means business, or out of business actually, as it's beginning the process of closing all stores.
You may recall toy retailers like KB Toys, FAO, and Toys "R" Us faced high-profile struggles several years ago. Dirt-cheap toys from popular discounters like Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) made it difficult for them to survive, much less do well. And of course online powerhouses like Amazon.com (Nasdaq: AMZN ) were on the scene, with which Toys "R" Us had quite the love/hate relationship as its one-time online partner.
In January 2004, KB Toys filed for Chapter 11 bankruptcy protection, citing soft holiday sales and steep competition. It's worthwhile to note that 2004 marked better overall economic times than we face now.
Of course, the most thought-provoking element now probably isn't the fact that KB's been in this position before (although I do love history), but rather that the current dismal economic times rang the real death knell. Apparently the company's sales actually weren't so bad in the beginning of the year. However, the court documents reveal that KB experienced a precipitous drop in same-store sales between October and December of this year -- a nearly 20% dive, in fact.
This falloff in sales was bad news for the toy retailer, which disclosed it has between $100 million and $500 million in debt, so now it plans to begin liquidating its stores, using immediate going-out-of-business sales in order to cover its obligations.
This development illustrates just how quickly things can unravel for a debt-laden retailer. We've already seen a fair share of bankruptcies; granted, many of them are in less-dire Chapter 11, but there are some Chapter 7 liquidations going on too. This year, some of the retailers that have entered some form of bankruptcy proceeding include Circuit City (NYSE: CC ) , Tweeter, Linens 'n Things, Mervyn's, Sharper Image, Bennigans, and Steve & Barry's.
Granted, KB Toys is a private company, but the investing lesson is clear: by all means, look around for retail stock bargains, but whatever you do, be sure to pick the strongest retailers with plenty of cash and little or no debt. These are ugly economic times, and weak retailers can unravel fast, and any form of bankruptcy usually wipes out shareholders. We may have to kiss some retailers goodbye in the coming months, so choose your stocks carefully.
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