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One of the most unforgiving eras in retailing has subsided. Compared with a large number of retail casualties and bankruptcies in recent years, fallout has been minimal this past year. At the same time, merger activity is picking up, indicating the retail business may be entering a boom phase as the economy mends.

That's not to say the industry has been immune from headline-grabbing industry shakeups. The bankruptcy filings of FAO and KB Toys along with massive store closures from these toy chains and segment leader Toys "R" Us added up to one tough year for toy retailing. Specialists faced market share loss to discounters such as Wal-Mart while battling a 3% decline in industry toy sales for 2003.

FAO, which filed for bankruptcy protection twice last year, decided to liquidate most of its assets, including its Zany Brainy and Right Start chains. KB Toys also went bankrupt and announced it would shutter about 375 of its 1,240 stores. Then Toys "R" Us, while still managing a profit last year, decided to shutter its freestanding Kids "R" Us and Imaginarium stores before the holiday season.

In all, the number of retail bankruptcies tracked by DSN Retailing Today more than doubled in 2003 to 14. Through the first half of this year, six more have occurred. But that's a significant improvement from the record of 26 filings in 2001.

Apparel retailers Gadzooks, Clothestime, Today's Man and Mr. Rags made the list, along with supermarket chains Penn Traffic and Eagle Food Centers. Music proved to be another difficult segment, with filings from Tower Records, The Wiz and Wherehouse Music as that industry battled declining sales due to the growth of Internet downloads.

Nine chains folded over the past 18 months, all but two of which had been in bankruptcy. Gateway was the latest, closing all 188 of its retail stores as the company returned to its roots as a computer manufacturer and direct sales company. Others were Bonus Stores, Clothestime, Mr. Rags, Today's Man and The Wiz, while Toys "R" Us essentially shuttered Kids "R" Us and Imaginarium units.

Perhaps the most surprising liquidation of the bunch was Bonus Stores, a dollar store operator that Icelandic retailer Baugur Group bought in early 2001. Despite the phenomenal success of other extreme-value chains, Bonus Stores apparently struggled, with the company closing 239 stores last year and then selling the last 97 at bankruptcy auction to Variety Wholesalers, a franchise operator of extreme-value stores. History may have been a handicap, since the retailer formerly known as Bill's Dollar Stores was in bankruptcy when Baugur bought it.

For relatively healthy retailers, downsizing was still top of mind, though not to the degree experienced in 2001 and 2002. Several food retailers shuttered stores, including Winn Dixie, Nash Finch, Albertsons, Grocery Outlet, Ralph's, Kash n' Karry, Penn Traffic and Food Lion. For most, declining food share was a problem along with incursion of alternative food formats, such as supercenters and warehouse clubs.

Department store retailers also had it tough. Federated announced it would close five stores, while Lord & Taylor, a division of May Department Stores, shuttered 32 units. Three of The Great Indoors stores went dark as owner Sears admitted this upscale home improvement and decor format had not met expectations.

On a positive note, several chains exited bankruptcy last year and others initiated public offerings. Kmart emerged from Chapter 11 in mid-2003 and more recently has shown a profit as a newly reorganized company with a back-to-basics strategy. Others leaving bankruptcy were Tower Records and Snyder's Drug Stores.

In the sporting goods sector, IPOs arose. Gander Mountain became public, while Cabela's and Bass Pro Shops have filed paperwork or shown interest in following suit.

And if merger activity so far this year is any indication, the retailing landscape is ripe for a new wave of consolidation. Several major deals have already taken place or are pending, including JCPenney's divestiture of its Eckerd drugstore chain, Target's sale of Marshall Field's to May Department Stores and Sears unloading of National Tire & Battery to TBC Corp. In each case, these deals represented a new mindset in corporate retail strategy related to focusing on core formats.

Earlier in 2003, Gart Sports set the stage for big deals in its merger with The Sports Authority, creating a 385-store chain. Other mergers of size included Boise Cascade's purchase of OfficeMax, FedEx picking up Kinko's and CompUSA buying Good Guys, to name a few. In international deals, Circuit City purchased Canadian retailer InterTAN, while Wal-Mart bought Brazilian supermarket chain Bompreco and increased its stake in Japanese retailer Seiyu to 37.8%. The Home Depot bought Mexican home improvement chain Home Mart, Staples expanded to the United Kingdom, with its purchase of Globus Office World and natural foods supermarket chain Whole Foods added the Fresh & Wild food chain in England.

As for what the rest of this year holds, Target has indicated it would also like to sell its Mervyn's chain, while many have speculated about further store closures at Kmart. Kmart recently signed a deal to sell 25 of its stores to Home Depot, with more such parceling off probable as the company focuses on staying profitable.

Fallout in the supermarket sector is also likely, given the continued struggles of smaller chains in a slow-growth industry and the expansion of Wal-Mart's supercenter business. The toy segment could also face continued challenges, along with music retailing and department store chains as a result of specific segment issues and shopping channel shifts favoring low-price retail formats.

Chapter 11
Filings

                         DATE OF  NO. OF UNITS
                         FILING   AT THE TIME

Footstar (1)               3/04        558
Garden Ridge               2/04         44
Tower Records (2)          2/04         93
Gadzooks                   2/04        410
Factory 2-U                1/04        243
KB Toys                    1/04      1,240
FAO Inc. (3)              12/03        142
Snyders Drug Stores (4)    9/03        155
Bonus Stores (OOB) (5)     7/03        335
Clothestime (OOB)          7/03        230
Paper Warehouse (6)        6/03        137
Penn Traffic               5/03        212
Eagle Food Centers         4/03         61
Fleming (7)                4/03        100
Today's Man (OOB)          3/03         24
The Wiz (OOB)              3/03         17
Spiegel (8)                3/03        560
Wherehouse Music           1/03        370
Mr. Rags (OOB)             1/03        130
FAO Inc.                   1/03        253

Source: DSNRT Research

(1) At the time of filing, Footstar operated
428 Footaction, 88 Just for Feet and 39
Shoe Zone stores and 2,498 Meldisco
licensed footwear departments

(2) Emerged from bankruptcy 3/04

(3) Bankruptcy filing was the second that
year for FAO Inc., which had emerged
briefly in 4/03.

(4) Exited bankruptcy 4/04

(5) Completed liquidation 9/03, selling its last
97 stores at auction to Variety Wholesalers

(6) 51 of these units are franchised

(7) Fleming, also a food distributor, was in
the process of selling its supermarkets
when it filed for bankruptcy

(8) Spiegel's retailing business includes catalogs,
560 specialty retail and outlet
stores and e-commerce sites including
Eddie Bauer, Newport News and
Spiegel Catalog

Mergers &
Acquisitions

                         BUYER OR                              NUMBER
ACQUISITION              MERGER PARTNER               DATE    OF UNITS

Marshall Field's (1)     May Department Stores       pending       62
White Cap Construction   The Home Depot              pending        0
  Supply (2)
Food Giant Supermarkets  Houchens Industriespending  90
Loehmann's               Crescent Capital            pending       48
Eckerd (3)               CVS/Jean Coutu Group        pending    2,799
Globus Office World (4)  Staples                     pending       59
Galyans Trading Company  Dick's Sporting Goods       6/04          47
Home Mart (5)            The Home Depot              6/04          20
Kbtoys.com (6)           Toy Acquisition Corp.       5/04           0
InterTAN (7)             Circuit City                5/04       1,002
MusicNow (8)             Circuit City                4/04           0
Shaw's (9)               Albertsons                  4/04         204
Bompreco (10)            Wal-Mart                    2/04         118
Kinko's                  FedEx                       2/04       1,200
Good Guys                CompUSA                     2/04          71
Fresh & Wild (11)        Whole Foods                 1/04           6
Creative Touch           The Home Depot              1/04           0
  Interiors (12)
Bob's Stores             TJX Companies               12/03         31
Economy Maintenance      The Home Depot              12/03          0
  Supply Company (13)
RMA Home Services (14)   The Home Depot              12/03          0
National Tire &          TBC Corp.                   12/03        225
  Battery (15)
OfficeMax                Boise Cascade               12/03        969
Harveys (16)             Delhaize Group              10/03         43
Installed Products       The Home Depot              10/03          0
  USA (17)
Elder-Beerman            Bon-Ton                     10/03         69
Wherehouse Music (18)    Trans World Entertainment   10/03        145
Paper Warehouse (19)     Party America               8/03         113
Gart Sports (20)         The Sports Authority        8/03         180
Odd Job Stores (21)      Amazing Savings             7/03          74
Christmas Tree Shops     Bed Bath & Beyond           6/03          23
Musicland (22)           Sun Capital Partners        6/03       1,100
Guilbert (23)            Office Depot                6/03           0
Greenbacks               Dollar Tree                 6/03          98
Kar Parts Auto Stores    Advance Auto Parts          5/03           8

Source: DSN Research

(1) In addition to sale of the 62-store Marshall Field's division,
Target also sold nine Mervyn's stores to May Department Stores

(2) Distributor of specialty hardware, tools and materials
targeting contractors

(3) JCPenney is selling its Eckerd drugstore business to two buyers;
CVS picked up 1,260 stores and Jean Coutu 1,539 stores.
CVS announced it would close 200 to 225 Eckerd stores once
the deal is finalized

(4) United Kingdom retailer

(5) Second-largest home improvement retailer in Mexico

(6) KB Toys divested its Internet retail business and licensed
trademarks. The former kbtoys.com Web site was to be
renamed etoys.com under Toy Acquisition, a division of investment
firm D.E Shaw

(7) Stores in Canada operate under the banners RadioShack,
Rogers Plus and Battery Plus.

(8) Digital music provider

(9) Sold by J. Sainsbury, Shaw's operates supermarkets in New
England under the banners Shaw's and Star Markets

(10) Based in Brazil; formerly a division of Royal Ahold

(11) Operates natural food markets in London

(12) Flooring supply company

(13) Wholesale supplier of maintenance, repair and
operations products

(14) Replacement windows and siding installed services business

(15) Formerly a division of Sears

(16) Operates supermarkets in Georgia and Florida

(17) Roofing and fencing installed services business

(18) Trans World acquired the stores of bankrupt chain
Wherehouse Music and announced it would close or sell 34
of the 145 stores.

(19) 51 of these units are franchised

(20) Merger created a 385-store chain to operate under The Sports
Authority banner

(21) Amazing Savings, an upscale closeout chain, purchased
90.3% of the common shares of Odd Job Stores.

(22) Sold by Best Buy, Musicland includes stores under the names
Media Play, Sam Goody and Suncoast

(23) European contract stationer that caters to large businesses

Store Closings
& Liquidations

                           DATE      NUMBER
                         ANNOUNCED  OF UNITS

Factory 2-U                 6/04       23
Nash Finch                  5/04       21
Winn-Dixie                  4/04      156
Gateway                     4/04      188
Albertsons (1)              4/04        7
Footstar (2)                4/04      350
Ralphs Grocery (3)          3/04       15
Grocery Outlet (4)          3/04       17
Footstar (5)                3/04      163
Gadzooks (6)                2/04      156
Circuit City                2/04       19
Garden Ridge                2/04        8
OfficeMax                   1/04       45
Kash n' Karry (7)           1/04       34
KB Toys                     1/04      375
Federated                   1/04        5
Dominick's                  1/04       12
Eddie Bauer                12/03       29
FAO Inc. (8)               12/03      142
Kids "R" Us (OOB) (9)      11/03      146
Imaginarium (OOB) (9)      11/03       36
Snyder's Drug Stores       10/03       77
Penn Traffic               10/03       41
Bonus Stores (OOB) (10)     9/03      335
The Great Indoors (11)      8/03        3
Clothestime (OOB)           7/03      230
Lord & Taylor (12)          7/03       32
Pep Boys                    7/03       33
Paper Warehouse             6/03       24
Mr. Rags (OOB)              5/03       63
Stein Mart                  5/03       16
Today's Man (OOB)           4/03       24
Eddie Bauer (13)            4/03       80
Gateway (14)                3/03       80
The Wiz (OOB)               3/03       17
Wherehouse Music (15)       1/03      150
Kmart                       1/03      317
Musicland (16)              1/03      110
Food Lion (17)              1/03       41

Source: Company reports and DSN Retailing Today research

(): Decline or loss

(1) Closures represent an exit from the New
Orleans market; at press time, Albertsons
exited the Omaha market, resulting in 21
additional closings

(2) Sold 350 Footaction stores to Foot Locker
at bankruptcy auction

(3) A California-based division of Kroger

(4) Grocery Outlet, which expanded to Texas
with the purchase of 17 stores from
Fleming, pulled out less than a year later,
citing a need to focus on growth in its
core western markets

(5) Closures included all 88 Just for Feet
stores and 75 Foot Action stores

(6) 31 closures previously announced

(7) Supermarket chain operated by
Delhaize Group

(8) Store count includes all 89 Zany Brainy, 15
FAO Schwarz and 38 Right Start stores

(9) Both are divisions of Toys "R" Us, which
retained elements of Kids "R" Us and
Imaginarium in its core toy stores while
shuttering all standalone units

(10) Filed for bankruptcy in July 2003, at that
time operating 335 stores, and completed
liquidation in September, selling its last 97
stores at auction to Variety Wholesalers

(11) Division of Sears

(12) Division of May Department Store Co.

(13) Division of Spiegel, Eddie Bauer,
announced the closure of 51 apparel
stores, eight home stores and one
outlet. Twenty other locations had
previously been slated to close

(14) Shuttered all retail units to focus on
manfacturing and direct sales

(15) Thirty of the 150 closures by Wherehouse
Music were previously announced

(16) Division that Best Buy acquired in
1999 and sold in June 2003 to Sun
Capital Partners

(17) Supermarket banner of Delhaze America

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