Some Stocks You Might Not Want to Play With

Your kids are expensive little items, right? They get toys. They get sporting goods. They go to designer nursery schools.

So it would stand to reason that stocks of young companies that have sprung up specifically to cater to the children’s market should be big winners on Wall Street--especially in a robust economy and runaway bull market.

Instead, many kid-oriented smaller companies have been disastrous investments over the last year or so, with many companies’ stocks way down from their 52-week highs.

Shares of Tomorrow’s Morning Inc., which publishes a weekly newspaper for the 8-to-14 set, have fallen to 88 cents from $6.56 in November. Kids Stuff Inc., which publishes catalogs with kids’ products, has dropped to $4.63 from more than $11 in June. Kid Kritter USA Inc., which manufactures and retails clothes for children from 3 months to 7 years old, has slumped to $1.31 from $5 in December.

And that’s just the beginning of the list. Entrepreneurs have been lured into this market because it looks easy, says Harold Vogel, entertainment analyst at Cowen & Co.

“It’s not rocket science, and with all the hype and attention to success stories like Barney--who I think should be shot--people wind up saying, ‘Hey, it isn’t that hard to be a success.’ ”

Reality is different. Vogel says even a great product doesn’t assure success.

“These days, you need a major brand or brand presence in order to get [retail] shelf space, whether it’s a CD-ROM or a regular toy,” he says. “And to get shelf space and a brand name, you need capital, but most companies exhaust their capital just developing these dinky little products.”

So fleeting are some producers of video games, CD-ROMs and other kid-friendly software that Arthur Pober, executive director of the Entertainment Software Ratings Board, says his office has trouble figuring out whom to bill because producers of kids’ software change hands or go out of business so quickly.

“I can’t tell you how many companies we see come in, hit it big on Monday and die on Tuesday,” he says. “My bookkeeper gets crazy. We don’t even know who we’re billing.”

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Companies that exploit the kid theme by operating day-care centers face other challenges, says Perry Boyle, analyst at BT Alex. Brown. Those that operate “work-site-based child care” tend to be winners, he says, pointing to Bright Horizons Inc. (a BT Alex. Brown banking client) and CorporateFamily Solutions Inc., which have had a steady flow of kids and comparatively stable stock prices.

But those companies, like Kiddie Academy International Inc., which operate centers away from the office, face the risks of changes in the age composition of neighborhoods, Boyle says. Kiddie Academy International filed for Chapter 11 bankruptcy reorganization in January because of “significant debt obligations,” according to a company filing with the Securities and Exchange Commission. Its shares last traded at 6 cents.

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Other kiddie companies also have had to concede failure. Kids Mart Inc., which operates a chain of infant and children’s apparel stores, filed for Chapter 11 bankruptcy reorganization in January 1997.

Children’s Broadcasting Corp. of Minneapolis said in April that fourth-quarter losses surpassed those of the previous year and that it would be ceasing its broadcasts of a 24-hour kids’ format called “Aaahs World Radio.” The company’s stock has fallen to $3.31 from $6.50 last June.

One company’s accountants have had to issue a warning on deteriorating finances. Kideo Productions Inc. markets “digitally personalized videos” in which the face of the child of your choice is inserted into a video of a popular licensed character such as Barney.

Kideo, which was delisted from the Nasdaq SmallCap market in September for having gone below minimum asset and capital requirements, filed a prospectus in late March in which the auditors said there were doubts as to whether the company could continue as a “going concern.”

Although the stock, which sold for $5 in a June 1996 initial public offering, has fallen to less than $2 a share, Richard L. Bulman, the company’s chief executive, says, “We’re only really getting moving now,” having just released Kideo’s first licensed products.

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There may be extenuating circumstances in some of the sad tales of kid-oriented companies spurned by Wall Street. Children’s Broadcasting has sued Walt Disney Co., claiming Disney failed to honor a key agreement Children’s Broadcasting had with ABC before Disney’s purchase of the giant broadcaster.

Children’s Wonderland, which operates care centers for both kids and the elderly, says its investment bankers are responsible for some of its woes. It has sued the bankers, alleging fraud and other sins. The company’s shares have fallen to 31 cents from a 52-week high of $1.56.

In the end, though, most struggling kid-related smaller companies simply have trouble competing in a world where bigger players prevail.

Kids’ clothes in the U.S. “is a $10-billion business,” said Kid Kritter USA in a January news release. Kid Kritter, though, is expecting to pick up just $2.5 million of that, which apparently is not enough to get grown-up investors excited.

There’s a “growing fashion-conscientious market,” the release went on, several fractured phrases later.

Alas, but not a growing investor-conscientious market for stocks like these.

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Not Much Fun

Newly public companies catering to the children’s market have not fared well in the last year.

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from Ticker 52-week 52-week Monday 52-week Stock symbol high low close* high Kids Mart KIDM $0.035 $0.001 $0.001 -97% Kiddie Academy Intl. KAII 1.200 0.030 0.060 -95 Tomorrow’s Morning TOMM 6.560 0.130 0.8 80-87 Children’s Wonderland CWIC 1.560 0.045 0.310 -80 Kid Kritter USA KIDK 5.000 0.880 1.310 -74 Kids Stuff KDST 11.250 3.380 4.630 -59 Kideo Productions KIDO 4.380 0.940 1.910 -56 Children’s Broadcasting AAHS 6.500 2.810 3.310 -49 Corporate Family Solutions CFAM 31.750 12.250 27.250 -14 Bright Horizons BRHZ 31.250 13.750 30.750 -2

%chg. Stock Kids Mart Kiddie Academy Intl. Tomorrow’s Morning Children’s Wonderland Kid Kritter USA Kids Stuff Kideo Productions Children’s Broadcasting Corporate Family Solutions Bright Horizons

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Note: Some of these stocks are thinly traded, so “Monday price” would be the last bid, or the price offered to sellers of the stock.

Source: Bloomberg News