The feedback that we’re getting on the mood in Hong Kong is that manufacturers are not so much cautiously optimistic as much relieved that 2003 is finally over. There seems to be an element of “It’s got to be better than the last three years.” Barring any unforeseen geopolitical normally be true but (and it’s a big but) Wal-Mart clearly has its eyes firmly fixed on competing toy retailers and is slowly squeezing the life out of them. Once that is accomplished it’s anybody’s guess as to who they’ll squeeze next.
Most retailers, excluding toy retailers, had a very strong holiday sales season with the flawed measure of comparable store sales at most of them up over 4%. Total sales for most were up well into the double digits. For toy retailers, on the other hand, the season was disastrous. FAO finally ground to a halt and will likely poke its head up with new ownership and an extremely scaled back presence. The KB situation smells a bit like a company that didn’t really have to declare Chapter 11 but is using bankruptcy laws as part of a corporate strategy to stiff their vendors and weasel out of leases. Total sales were down at Kmart, but that’s easily attributable to having fewer stores. More importantly, they were profitable so at least it appears that they are being managed properly.
The linchpin is Toys ‘R’ Us. While the reduced number of stores at FAO and KB should clearly benefit TRU, they have Wal-Mart camped at their front door like a big cat, well fed but still hungry for more. TRU had lousy sales numbers, weakening margins and their debt was cut to junk status by Standard and Poors. I would look for them to be very demanding on the markdown money department. “We’ve had a lousy year and you’re going to pay for it.” Of greater long term concern is that thus far, corporate strategy seems to be exactly wrong with little sign of any new clear thinking. Will management be able to come up with a new strategy that can succeed against big W? Or will the focus continue to be on new corporate headquarters and sculptural boondoggles. Is it better to have no strategy at all or to have a bad one and be driving hard down that wrong road? These philosophical questions will certainly be much discussed over late night cocktails in cold February New York. I can almost hear the fiddling even as I whiff the strong smell of smoke.
See you in New York,