Last Updated on April 22, 2018 by Dave Farquhar
When KB Toys closed is a relative question. While KB Toys went out of business in 2009, the store closest to you may have closed earlier than that. It was a sad end for a staple of my childhood, and possibly yours. KB Toys isn’t the only toy store to go out of business of course, but it was one of the more notable ones.
For a kid like me growing up in the 1980s, the store, then known as Kay Bee Toy and Hobby, was the best store in the world. It had Star Wars and GI Joe toys. But it also sold model kits, video games, model rockets, model trains, and baseball cards. They packed everything a kid could want in a small store. Kay Bee made a trip to the mall something to look forward to, rather than something to dread.
Kay Bee had its origins in 1922, and took on its longtime name in the 1940s. By 1981, it had 210 locations. In 2003 it had 1,300 stores.
The model worked well in the 1980s. It was more uneven in the 1990s, although the chain continued to grow. One piece I think analysts forget to mention is that in the 1980s, Kay Bee had less competition. There were other toy stores, but KB was in places they weren’t. Kay Bee had locations in places like Columbia and Jefferson City, Missouri. The bigger stores like Toys R Us and Children’s Palace weren’t in towns like that. When the only competition was the toy aisle in the discount stores, KB could get a lot of traffic and sales.
Bigger competitors move in
In the 1980s, chains like Children’s Palace and Kiddie City went under. Toys R Us expanded to fill the void, and they did in a big way. Any commercial district that was big enough to have a mall soon had a big Toys R Us store nearby as well. KB couldn’t compete on price or selection.
KB got squeezed from the other side as well. In the late 1980s, discount stores started expanding into larger format stores as well. The toy section at a stores like Wal-Mart and Target went from being half the size of a KB to rivaling KB in size.
But in some ways KB was ready. KB always had a mix of bargain-priced closeouts along with new, high demand merchandise at full price. As the competition stiffened, KB moved more and more into closeouts, even operating separate stores, with closeouts in one store and new toys in the other.
In 1996, the chain boasted $1.1 billion in sales, and it grew to $1.6 billion by 1998. But it faded fast. KB filed bankruptcy in 2004 and again in 2008.
Changing ownership
The company changed hands a few times, in 1981, 1996, 2000 and 2005. The 1981 purchase placed it under the control of Melville Corporation, an operator of retail stores. It was the predecessor of CVS Corporation, the drug store giant.
In 1996, Melville sold KB to Consolidated Stores Corporation, now known as Big Lots Inc. The synergy worked, given the two chains’ affinity for selling closeout merchandise at a discount. As part of Consolidated, it grew to the second largest toy chain in the country. Consolidated considered an IPO, then sold the chain. It showed good timing on Consolidated’s part.
Bain Capital and KB
In 2000, Bain Capital bought KB. Bain Capital’s role in KB’s demise became an issue in the 2012 presidential race because of Republican nominee Mitt Romney’s ties to the firm. This was a loose connection at best, however. Romney left Bain Capital in 1999. So while Romney profited from some of Bain Capital’s decisions regarding KB, Romney did not directly make those decisions.
Bain Capital’s buyout was highly leveraged, and the company’s debts hastened its demise. On Bain Capital’s watch, KB took on debt in a maneuver called a “dividend recapitalization.” It allowed Bain to take a quick profit on the deal but left KB Toys with more debt.
Oddly, Bain Capital described itself as a turnaround artist, but at the time, KB didn’t need to be turned around.
Unfortunately for KB, the timing was awful. The new debt and expansion came just before a bad Christmas season, and during a time when its entire business model was becoming obsolete. During that decade, retail was shifting from indoor malls to outdoor “lifestyle centers” consisting of clusters of big-box stores. Even before the Bain Capital buyout, KB was having trouble finding good locations to open new stores. Many of the malls that once featured KB locations are closed now themselves. Crestwood Plaza near St. Louis is an example that hits home for me.
The combination of declining mall traffic and a poor 2003 Christmas season drove KB Toys into bankruptcy in January 2004. It closed more than 600 stores and emerged from bankruptcy in 2005, with 640 stores remaining. Bain’s creditors sued, as did Big Lots Inc. The Big Lots lawsuit was dismissed, and Bain settled the other suit for $27 million.
Closing and liquidation
Another private equity firm, Prentice Capital Management LP, took ownership in 2005. But KB’s problems with declining mall traffic still existed, and the economy soon went into a full-blown recession. Making matters worse, in the summer of 2007, numerous toys had to be recalled due to lead contamination. Moreover, toy sales were flat, at around $22 billion, for three straight years. So there was no natural growth to help KB at the time.
In November 2007, it announced it would be closing 156 more stores.
By 2008, a slimmed-down KB was bankrupt again and its share of the toy market had withered to a paltry 2 percent. In 10 years, it had gone from the second largest toy retailer in the country to ceding nearly all of its market share to Toys R Us, Wal-Mart, and Target.
KB began liquidating its remaining 431 stores in December 2008. The last stores closed February 9, 2009.
In September 2009, onetime rival Toys R Us purchased the KB brand, trademarks and online properties. The KB brand lived on for a time as a private label that Toys R Us marketed within its large-format stores.
KB had survived recessions before, in the late 1970s, early 1980s, and early 1990s. But it survived and thrived in the harsh 1990s by making skillful maneuvers, knowing when to close stores and when to expand, knowing what to sell, and how to present it to draw in traffic that hadn’t necessarily come to the mall to buy toys.
The leadership that weathered the previous storms wasn’t there anymore in 2005-2009. That’s why a once-great brand name found itself reduced to a private label on its erstwhile rival’s shelves.
And speaking of Toys R Us…
Bain Capital did something else in 2005, after it divested KB. It partnered with KKR & Co. and Vornado Realty Trust to do a leveraged buyout of Toys R Us. The result was predictable. By 2017, Toys R Us was bankrupt, and in March 2018, Toys R Us announced plans to close all of its stores.
The return of KB Toys
In mid-March 2018, Strategic Marks announced it had purchased the KB Toys trademark and announced plans to open as many as 1,000 popup stores under the old brand in time for Black Friday 2018. Depending on traffic and revenue and the ability to get leases, Strategic Marks would then consider keeping some stores open after the 2018 Christmas season.
David Farquhar is a computer security professional, entrepreneur, and author. He started his career as a part-time computer technician in 1994, worked his way up to system administrator by 1997, and has specialized in vulnerability management since 2013. He invests in real estate on the side and his hobbies include O gauge trains, baseball cards, and retro computers and video games. A University of Missouri graduate, he holds CISSP and Security+ certifications. He lives in St. Louis with his family.
For me it was Lionel Kiddie City, an off-shoot I believe of Roy Cohn’s holding company that rode JLC’s Lionel namesake to the bottom. LKC was a direct competitor to Toys ‘R Us…massive footprint, good prices, but LKC also carried regional products as well. I bought nearly all of Avalon Hill’s wargame library in there during the early 1970’s (AH was a Baltimore-based company). When Lionel was purchased by General Mills LKC was all that remained of the empire. But for about fifteen years I spent every spare dollar I had in that place.
Yes it was, and yes, it was the same Roy Cohn who palled around with politicians past and present.