KB Toys — The Mall’s Toy Store, Buried by a Dividend and a Recession

KB Toys was the toy store of the American mall — small, crammed, fluorescent, the place you ducked into between the food court and the department store anchor — and on December 11, 2008 it filed for bankruptcy for the second time, beginning the going-out-of-business sales that shut all 461 of its remaining stores by February 9, 2009. It is not Toys “R” Us. Where Toys “R” Us was the freestanding big-box, KB was the compact mall specialist, descended from a Massachusetts wholesale candy business that brothers Harry and Joseph Kaufman opened as Kaufman Brothers in Pittsfield on April 1, 1922. The company became Kay Bee Toys, then KB Toys, and at its May 1999 high-water mark it ran 1,324 stores — the dominant toy chain inside America’s malls and, by store count, the country’s second-largest toy retailer.

The chain died of three things, in order: leverage, the discounters, and a recession. In December 2000 the private-equity firm Bain Capital bought KB Toys for about $305 million, putting in only around $18 million of its own equity and loading the rest as debt onto the company. In April 2002 Bain extracted an $85 million dividend through a recapitalization — a payout creditors would later argue rendered KB insolvent. The chain filed its first Chapter 11 in January 2004, closed more than 600 stores, and laid off over 3,400 of its 13,000 employees, emerging in August 2005 under Prentice Capital Management, smaller and still fragile.

Then came the shock that finished it. Walmart and Target had turned toys into a loss-leading price war a mall specialist with higher rents could not win, and Amazon took the rest. When consumer spending collapsed in the fall of 2008, KB’s same-store sales fell nearly 20% in the weeks that should have been its richest — the run-up to Christmas, when toy sellers earn up to half their annual revenue. Citing debt “directly attributable to a sudden and sharp decline in consumer sales,” the 86-year-old company filed again on December 11, 2008, with roughly 10,850 employees (about 6,500 of them seasonal). This time it liquidated. The brand was sold to Toys “R” Us for about $2.1 million in September 2009 — the mall toy chain ending up a trademark owned by the big-box rival that had helped bury it.