NEW YORK (CNN/Money) -
It wasn't a happy holiday for toy retailer KB Toys and clothing disounter Factory 2-U -- both filed for bankruptcy this week, and some analysts warn that more retail chains could follow suit.
Pittsfield, Mass.-based KB Toys Wednesday became the second major toy retailer to succumb to the onslaught by the discount retailers, which sell many of the same toys but at much cheaper prices.
Signs came early in the season after KB found itself strapped for cash and slashed toy prices further leading up to Christmas, and announced that it would delay paying its toy and video game vendors.
In December, FAO Inc., owner of the upscale toy merchant FAO Schwarz, filed for bankruptcy protection for the second time, citing dismal holiday sales. It's currently in the process of selling off its assets.
"In the toy industry, about 60 percent of the independent retailers have already gone out of business," said Howard Davidowitz, an independent retail consultant.
"First it was the giants like Toys 'R' Us and KB Toys that snuffed out their competition. Now its Wal-Mart and Target who own the toy business and they're doing the same thing to both Toys 'R' Us and KB Toys," he said.
Industry watchers say specialty apparel retailers are also under pressure.
The consensus among analysts was that the group wouldn't post blowout numbers for the holiday. But the overall results came in better than expected for most -- but not all -- of the names as sales picked up closer to Christmas from a last-minute surge in buying.
"Specialty apparel is a very fast-moving business," said Davidowitz. "It's also a fickle business of fashion and creativity where the winners are those retailers who can constantly reinvent themselves and their products."
Factory 2-U (FTUS: Research, Estimates), which sells brand-name casual apparel at bargain prices, didn't make the cut. The San Diego-based company, with about 243 stores around the country, filed for Chapter 11 bankruptcy protection Tuesday, citing soft holiday sales and the difficulty it faces competing with Wal-Mart.
Brian Tunick, analyst with J.P. Morgan, wrote in a recent research report that he anticipates three or four more clothing chains "have the potential to file for bankruptcy over the next 12 to 18 months, if not sooner."
"Too much capacity and pricing pressure continue to weigh on specialty apparel results," Tunick said."We just have too much square footage chasing a shrinking apparel market.
"The Abercrombie & Fitches, American Eagles, Wetseals, Limited Too's, Gadzooks, Charlotte Russes, Talbots, Charming Shoppes all will likely continue to face tough environments in 2004," he said.
Does that mean all of these names headed towards bankruptcy? Not likely, said Tunick.
But among the retailers he's watching closely is Gadzooks (GADZ: Research, Estimates), the mall-based seller of clothing for young girls. The Carrollton, Texas-based chain has had a long string of comparable sales declines, including a stunning 28 percent drop in November and a further 25 percent fall in December.
The company recently announced it would shut 35 out of about 415 nationwide.
Wilsons Leather (WLSN: Research, Estimates) is also on Tunick's radar.
Sales at the retailer of jackets and other leather wear have fallen nine of the past 10 months, including a 6.8 percent drop in December. The company fueled more speculation about its future after announcing last week that it would ask its lenders to waive some credit agreement covenants because of its sales shortfall in December.
The company operates nearly 600 stores in the United States.
Gadzooks declined to comment on the story. Wilsons Leather could not immediately be reached for a response.
Teen apparel chain Abercrombie & Fitch (ANF: Research, Estimates) has also posted a long string of sales declines but Tunick thinks the company's strong cash position and the fact that it continues to grow its earnings despite weak sales probably will save it for now.
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