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A Christmas letdown
Toy sellers, Gadzooks, American Greetings among merchants said to feel the holiday blues this year.
December 31, 2003: 10:19 AM EST
By Parija Bhatnagar, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Retailers overall may have fared better than expected this holiday season, but it still looks like Santa Claus couldn't make all the merchants merry this year.

The final tally on the critical November-December shopping period won't be out until early January. However, industry watchers are betting that the season was anything but festive for a few names, including as toy retailer Toys 'R' Us and teen apparel merchant Gadzooks.

When it's all over, independent retail analyst Kurt Barnard thinks that many more retailers will report December sales that were either in line or below forecasts.

"There are a lot of companies out there whose essential business operating concept is past its prime and therefore their comparable sales are on a gradual decline," Barnard said.

Here are some holiday retail disappointments:

Trouble in toyland: Independent toy retailers are struggling for survivability amid intense competition from the discount behemoths Wal-Mart (WMT: Research, Estimates) and Target (TGT: Research, Estimates), which sell many of the same toys but at much cheaper prices.

A report out Tuesday from MasterCard Advisors, a unit of MasterCard International, indicated that sales at toy stores, including Toys 'R' Us (TOY: Research, Estimates) but excluding toys sales at discount stores, slipped 7.7 percent, compared with last year

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Wayne, N.J.-based Toys 'R' Us (TOY: Research, Estimates), with more than 680 of its namesake stores in the United States, last month warned about its fourth-quarter and also said it would shutter all of its 146 Kids 'R' Us stores.

"If even a big player like Toys 'R' Us is reeling from the brutal onslaught by the discounters, for the smaller players it's a lot worse," said Ken Perkins, retail analyst with Thomson Financial.

Earlier this month, FAO Inc., owner of the upscale toy merchant FAO Schwarz, filed for bankruptcy protection for the second time, citing dismal holiday sales.

The King of Prussia, Pa.-based company, with about 142 retail stores nationwide, first sought protection from creditors in January and emerged three months later. The company is currently in the process of selling off its assets

And Pittsfield, Mass.-based KB Toys found itself strapped for cash and slashed toy prices further in the days leading up to Christmas. The retailer also said that slow sales over the holidays would force it to delay paying its toy and video game vendors.

No teen spirit here: Specialty apparel merchants aren't expected to post blowout numbers for the holidays. Just Wednesday, women's clothier Christopher & Banks (CBK: Research, Estimates) blamed the early-month snowstorms and intense competiton for a 7 percent decline in its December sales.

Analysts say one retailer facing a tough challenge is Gadzooks (GADZ: Research, Estimates), the mall-based seller of clothing for young girls.

Gadzooks posted a stunning 28 percent drop in comparable sales in November, the fifth straight month of declining sales. The Carrollton, Texas-based retailer, operator of about 415 stores nationwide, recently said it may have to consider federal bankruptcy protection if it runs out of cash.

"Gadzooks exited its boys business this year and that was 50 percent of its sales. That's part of the reason that has hurt its comparable sales," said Steve Denault, analyst with Craig-Hallum Capital.

"Other than that, Gadzooks' strategy is to be a fashion follower and not a trail blazer," Denault said. "As a result, half of what they sell to teen shoppers today is relevant and the other half isn't."

By contrast, pace setters in the teen sector such as Hot Topic (HOTT: Research, Estimates) and Pacific Sunwear (PSUN: Research, Estimates) have defied the apparel slump through much of the year.

Can't discount the disappointment: Both Wal-Mart (WMT: Research, Estimates) and Target (TGT: Research, Estimates), the No. 1 and No. 2 retailers, have said their December sales gains won't meet the rosiest of expectations.

While Wal-Mart indicated that it sees sales for the month tracking at the low end of its earlier guidance of a 3 percent to 5 percent gain, Target said its sales for the month were running near the low end of its estimates for its discount stores despite a strong Christmas week, and were below expectations for the company overall.

Target earlier forecast December sales to rise between 5 to 7 percent.

"With Wal-Mart it's still a wait-and watch situation, but Target's news is a little worse," said Barnard. "The problem with Target is that its department stores are underperforming."

Discount retailer Shopko Stores (SKO: Research, Estimates) also didn't get what it wanted for Christmas. The Green Bay, Wis.-based company warned that it would miss its profit target for the fourth quarter because of weak holiday sales despite clearances and promotions.

It's in the cards: American Greetings, the No. 2 maker of greeting cards behind Hallmark, last week lowered its full-year profit estimate, citing weak early holiday sales.

The Cleveland-based company that makes the American Greetings, Carlton Cards and Gibson Greetings brands of cards said the softness in its seasonal business would also impact its gift wrap and other retail operations in the fourth quarter.

"American Greetings' (AM: Research, Estimates) business wasn't as robust as it has expected because people are waiting until later in the season to buy holiday-related supplies like cards and gift wrap, said Thomson Financial's Ken Perkins.

Added Perkins, "Is Wal-Mart also hurting its business? I think cheaper products at the discount stores did have a marginal impact on the company's sales."  Top of page




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