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Update: Consolidated Stores to Sell KB Toys

Updated from 1:13 p.m. EST

Consolidated Stores (CNS - Get Report) said Wednesday that it would sell its KB Toys division to an unnamed bidder for roughly $300 million, less than it paid for the unit, and would take a charge of up to $400 million because of the deal.

Consolidated, which had said in June that it would divest the toy division, is seeking to stimulate its languishing stock and concentrate on raising sales at its close-out stores -- the Odd Lots, Big Lots and Pic 'N' Saves and others that sell products that have been overproduced or discontinued.

The announcement comes at a time when many retailers are coping with an apparent slowdown in consumer spending stoked by higher interest rates and fuel prices as well as an unpredictable stock market. Those conditions inflict greater pain on the budget-conscious shoppers who frequent close-out chains, but they also may draw consumers who are looking for better values.

Referring to the tougher climate, Consolidated said Wednesday that it missed Wall Street's profit target for the third quarter, reporting earnings from continuing operations of $6.6 million, or 6 cents a share, compared with $7.7 million, or 7 cents a share. Analysts polled by First Call/Thomson Financial, a research firm, had anticipated earnings of 7 cents a share.

Shares of Columbus, Ohio-based Consolidated, which have fallen more than 50% from a 52-week high of $21.88 hit about a year ago, finished Wednesday regular trading down 69 cents, or 6%, at $9.94.

The sale price of about $300 million and the third-quarter charge of $350 million to $400 million the company will record are both disappointing, said Margaret Whitfield, an analyst at Tucker Anthony Capital Markets. After all, she said, Consolidated bought KB from Melville Corp. in 1996 for $315 million.

And while the past year has been a lackluster one for toy retailers, next year promises to be a more prosperous in part because of potentially hot new video game and software products in the pipeline. Yet with the sale, Consolidated would be unable to capitalize on the turnaround, she said.

The divestiture of KB was aimed in part at breathing life into Consolidated shares, yet it's uncertain whether the deal on the table would accomplish that. "At the end of the day, it does not appear to benefit Consolidated shareholders," Whitfield said, noting that a spin off of the division would have been more beneficial. Whitfield's firm rates Consolidated market perform and has not done any underwriting for the company.

Although the sale would result "in a significant write-down of our balance sheet," it would enable the company to scale back debt and take a more efficient and predictable path to improving earnings, Michael Potter, the company's chairman and chief executive, said in a statement.

Another analyst, Jeffrey Stein of McDonald Investments, said the company may be getting a poor price for the toys division, but the development announced Wednesday is an auspicious sign for a company trying to turn itself around. The agreement to sell the unit should improve the company's stock market performance, he said.

"Could they have gotten a better price? Possibly," said Stein, whose firm rates the company's stock a buy and has done underwriting for Consolidated in the past. "But the bottom line is that they put this chapter in their life behind them. And they did that."

Concerned about a more sluggish "pace of general customer traffic," the company also acknowledged that its profits likely would fall short of analysts' estimates for the fourth quarter as well. Consolidated now expects earnings of 62 cents to 66 cents a share in the fourth quarter, below the 67 cents a share that analysts had predicted, but higher than 57 cents a share a year earlier.

At the same time, however, the company, hoping to get a boost from holiday shoppers, still believes it can "deliver a respectable fourth quarter," Potter said in a statement.

First, Consolidated must complete the KB deal. At this point, the company has signed a letter of intent with an undisclosed bidder to sell the unit, but the purchase price is still being negotiated and could change.

The company also emphasized that it must work out "several important issues" before it closes a deal and that it is possible the agreement would fall apart. The company said it is delaying the release of its third-quarter balance sheet because of the status of the negotiations.

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