BIG TROUBLE IN TOYLAND : Debt-Ridden Worlds of Wonder, the Maker of Teddy Ruxpin, Is Looking for Way Out of Woods
Worlds of Wonder is in worlds of trouble.
Its best-known toy, the Teddy Ruxpin stuffed talking bear, isn’t a big seller anymore. The company is deeply in debt; it recently fired half its work force, and it has put itself up for sale. Analysts who follow the industry, in fact, wonder if the Northern California toy company will last much beyond Christmas.
If an investor doesn’t step forward to bail out the company, Worlds of Wonder may not be around next year, says Barry Rothberg, an analyst with Mabon, Nugent & Co. in New York. “In no way can it salvage this year,” he says.
Two years ago, the start-up company made toy history with Teddy Ruxpin, a bear that talks with the aid of a special cassette tape. Consumers were charmed and paid $70 each for the bears. With only Teddy, the company had sales of $93 million that year, the most ever for a new toy.
Investors, too, were dazzled. Worlds of Wonder went public in June, 1986, at $18 a share, but eager stock buyers quickly drove its price up to $29. Now they’re bailing out. Worlds of Wonder’s shares closed Friday at $1.25 in over-the-counter trading.
Welcome to the Silicon Valley’s latest riches-to-rags story. Bolstered by the success of Teddy Ruxpin, the company poured money into development of more than 100 high-technology toys. Only a few have paid off.
Meanwhile, Worlds of Wonder no longer has the “talking toy” market to itself. Such competitors as Mattel, Playmates Inc., Lewis R. Galoob Toys, Coleco and Ideal have talking toys. The market is so crowded with toys that burp, cough, sneeze and hiccup that no one is expected to do well. Richard Sallis, a marketing vice president at Playmates Inc. in La Mirada, predicts a shakeout.
By now the plot must be familiar to Donald R. Kingsborough, chairman of Worlds of Wonder. He was a marketing executive at Atari when that company’s fortunes collapsed with the videogame market in 1983. Worlds of Wonder executives did not respond to requests for comment last week. In an earlier interview, Kingsborough resisted a comparison to Atari, which has recovered under Jack Tramiel, the Commodore International Ltd. founder who bought Atari in 1984.
Worlds of Wonder can survive an industry shakeout, he argued, because its toys have lasting appeal. Talking toys aren’t a fad, he argued, but a category that will last for years. “There will always be a Teddy Ruxpin,” he says.
Worlds of Wonder, with $327 million in sales during its last fiscal year, isn’t much of a factor in the $12.5-billion toy industry. It is dwarfed by larger and long-established giants such as Hasbro and Mattel, which each have sales that exceed $1 billion.
But its high-flying status on Wall Street and its recent dive continue to make it a company to watch in Silicon Valley.
It is “an extreme example of a company that has gone too far, too fast,” says John E. Klauer. He is chief financial officer of Axlon, a 2-year-old Silicon Valley company that has stopped making high-tech toys.
Small toy companies can’t survive an industry slump, or massive competition, he says. “It’s just too expensive for these companies to get involved in designing, manufacturing and warehousing toys.” Klauer adds: “They are at the mercy of suppliers in Hong Kong. If they blow delivery, it’s over.”
That’s a familiar problem to Worlds of Wonder. Its talking Pamela doll was delivered late to toy stores last Christmas. The talking dolls by Galoob and Playmates were big hits, but Pamela was a flop.
The company missed an opportunity with Lazer Tag, too. The toy, a game with guns that shoot infrared beams at targets, was a big hit last year. But many shipments didn’t arrive until after Christmas, and retailers were left with unsold gun sets.
The problem continues: Costly production difficulties have delayed shipments of radio-controlled Muppet toys and Wondervision videocassettes until next year. Worlds of Wonder’s dancing Little Bopper dolls were delivered late.
This Christmas, the company is depending on sales of Julie, a $119 talking doll with sensors that allow it to “read” special storybooks or “feel” cold. The company is shipping 150,000 this Christmas.
But late shipments of the doll could hurt sales. Julie arrived at Play Co. stores in San Diego just a few weeks ago, long after talking dolls by other manufacturers. So far, sales of Julie are spotty, says Richard Brady, Play Co. vice president. But he reports flat sales of other high-price talking dolls, such as Mattel’s Baby Heather and Coleco’s Cabbage Patch.
Some less expensive toys are doing better. Brady says every Teddy Ruxpin he had was snapped up at $30, down from $70 last Christmas. Little Boppers are doing well.
Even so, the company’s prospects look gloomy. It is virtually out of cash and losing money. It lost $46.86 million during the three months that ended Sept. 30, while it took in $49.7 million in sales.
Its inventories are bloated with unsold toys and parts. Inventories stood at $128.48 million on Sept. 30, up from $56.34 million on March 31.
The company’s finances are so strained that it missed a $3.6-million bond payment that became due a week ago. Worlds of Wonder has 30 days to make the payment but isn’t optimistic.
Creditors Losing Patience
Ten days ago, the company met in private with its major creditors, who formed a committee to develop a repayment plan. The company said that as of Sept. 30, it owed its creditors $90.1 million and its banks $71.8 million, in addition to $80 million in long-term debt. Few details from the meeting were available because creditors had to sign non-disclosure agreements.
But some creditors have apparently lost patience with the toy company. Two are suing to collect on unpaid bills. The company also faces class-action lawsuits from two shareholders, who allege that the company misled them with rosy sales projections. The company denies the allegations.
Worlds of Wonder has taken several dramatic steps to reduce costs and raise cash. Nine days ago, it fired nearly half its work force, reducing the number of employees to 211 from 411 in March. Hoping to raise cash quickly, it lowered prices on its toys, particularly Teddy Ruxpin, the talking Pamela doll, Lazer Tag and the Action Max videogame system.
To offset the price reductions, Worlds of Wonder set up a $29.75-million reserve for price reductions in its fiscal second quarter, that contributed to its recent quarterly loss. Some retailers report that the lower prices have boosted Teddy Ruxpin sales. Sales of the Action Max videogame system are lower than competing Atari and Nintendo systems because it needs a videocassette recorder to work.
In lowering the prices, Kingsborough is taking a step he refused to consider four months ago, when the rest of the toy industry was discounting prices on talking dolls and laser games, such as LJN’s Photon.
Besides firing workers and lowering prices, Worlds of Wonder is looking for ways to raise cash. The company said it is considering a range of options, including the sale of assets, a private placement of debt or a joint venture. The company even said it was willing to sell itself to another company, and has hired Bear, Stearns & Co., a New York investment firm, to help it recapitalize.
Analysts say it’s in creditors’ best interests to help keep the company going, at least through Christmas, the biggest season for toy sales and the period when Worlds of Wonder has the best chance of selling its merchandise.
But toy industry analysts also say the company is not likely to find a buyer. Rothberg, the toy analyst, says a buyer would have to take on Worlds of Wonder’s debt and other problems. “Who knows what a buyer would find after they went in there?”
