The Malls Get Decked: The Winter of Misfit Toys

You may be a mean one, Mr. Grinch, but you're no Pokemon.

Monday

Why Retailers Fear a Red Christmas

Tuesday

The Winter of Misfit Toys

The Good News at the Gap

Wednesday

Retailers Minding Too Many Stores

Holiday Shopping Bag: Maybe the Web Can Work After All

Jim Carrey's turn as the furry, green, would-be Christmas stealer may prove to be a box office draw, but it's not likely to generate much buzz in toy aisles -- at least not enough to provide retailers with a blockbuster season. There's simply a lack of the sort of hot items that, in the past, have sparked shopping center brawls among full-grown adults, and that makes this year a challenging one for toy retailers -- both off-line and on.

"It's a pretty dull year in the toy business," said Tom Alfonsi, executive vice president of merchandising at KB Toys, on a recent Merrill Lynch conference call.

Problems

This season's icon?

It's not as simple as a lack of Furby-worthy ideas. First, the manufacturers have had a tough couple of years. Mattel (MAT) has been distracted by its disastrous purchase and sale of the Learning Co. Hasbro (HAS), meantime, has seen once-hot demand for Star Wars and Pokemon merchandise decline. In October it warned of lower-than-expected earnings and said it would close three production facilities. That kind of turmoil has likely led to caution, said Alfonsi.

Moreover, Alfonsi said the phenomenon of age compression -- or kids growing up faster -- is real. "They're playing sports at a younger age, and they're into music and fashion much earlier than they ever were," he said. "Fifteen years ago a 10-year-old girl was interested in a toy store. Not anymore." (Back in April 1999, TheStreet.com reported on age compression and what it meant for Disney (DIS).)

The result: There just aren't too many hot items out there. The year's great electronic hope, Sony's (SNE) Playstation 2, isn't going to be widely available due to shortages. "If there was substantial product, we'd be talking about Playstation 2 as a major growth engine," said Toys R Us (TOY) CEO John Eyler on a recent earnings conference call. (Earlier, TSC wrote about what the shortage will mean for Electronic Arts (ERTS)). Pokemon and Star Wars are passe, and there aren't any other big toy licenses that are expected to drive sales.

"We had the opportunity to do stuff with the Grinch, but we didn't buy any merchandise at all," said Alfonsi. "Once Dec. 26 comes around, it's all markdowns."

Selling It

So what are toy retailers doing about it?

First, though there's nothing on the level of a Cabbage Patch Kid, there are some items that are expected to sell well. Although scooters have already been wreaking havoc on the sidewalks in some areas, there's still some demand out there for Razors and their knockoffs. Robotic dogs like Fisher-Price's Rocket the Wonder Dog and Manley's Tekno the Robotic Puppy will also likely sell well, particularly after Sony's pricey version got some air time on the latest installment of the MTV series The Real World.

Toys R Us, which last year suffered when it ran out of key products, this year says its goal is to stay in stock on the 1,500 top items in the hopes of having a broad-based holiday sales success. "It's tougher to generate the volume without hot items," conceded Eyler on the conference call. "But it bodes well for the future if we can do it."

That includes emphasizing traditional items like dolls and games. "Basic areas are fundamentally strong," said Gregg Steinhafel, president of Target's (TGT) namesake discount division, on a recent conference call.

Promotions

And, of course, like retailers everywhere, toy sellers are offering money-saving promotions. Amazon.com(AMZN) and ToysRUs.com's jointly operated site is offering free shipping before Nov. 22 on orders of $100 or more. Toys R Us' Eyler told investors that while the company keeps tabs on prices at general merchandisers like Wal-Mart (WMT), it won't match discounters' prices to the penny.

Given that the consumer is likely to be more reluctant to spend this year, "Pricing is definitely going to be an issue" for driving sales, says Emme Kozloff, a retail analyst at Sanford Bernstein. That's especially true for online retailers, since prices can be so easily compared. Kozloff compared prices on 10 top items at five sites: WalMart.com, Target.com, Kmart's(KM) Bluelight.com, Amazon/ToysRUs.com, and eToys (ETYS). Wal-Mart.com had the best prices on half the items and was either No. 1 or No. 2 in nine items. eToys, meantime, was top on three categories and in the top three 60% of the time. And Amazon/ToysRUs.com was in the top three on all 10 toys but had the best price on only one item.

Shakin'

So how will this all shake out? Toys R Us, for one, is optimistic about the holidays. Last week it posted a narrower-than-expected third-quarter loss and said it would meet or exceed analysts' estimates for the fourth quarter and the fiscal year. Its stock rose close to its 52-week high.

Wal-Mart is so huge that toys aren't going to make a big difference to its bottom line, anyway; it can easily cut prices on the most popular items to generate traffic in its stores. Trickier to forecast are the fortunes of KB Toys -- being sold by its parent, Consolidated Stores(CNS) -- and its affiliated Web site, KBkids.com, which last year spent heavily to build its brand. This year it's pulled back on marketing, has cut the number of items it offers and is no longer trying to compete so aggressively on price.

The lackluster season may be toughest on the pure-play e-tailers, who are racing to gain enough scale to reach profitability before their money runs out. SmarterKids.com(SKDS) said last week it would merge with privately held Earlychildhood.com and start making money next year.

eToys, meantime, is trying to reinvent itself as a specialty retailer, with separate eToys.com, BabyCenter.com and ParentCenter.com brands. That may be difficult to achieve while also staying on track to make money in 2002, as management has predicted. "eToys is going to have a harder time generating the kind of volume they want to get," says Melissa Williams, an analyst with Gerard Klauer Mattison. (She rates eToys a neutral and her firm hasn't done underwriting for the company.)

And there's no Pikachu to the rescue.

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