A Toy Makers Search for Cheer

Struggling Russ Berrie hopes for a big lift from the holidaysOAKLAND

For plush-toy maker Russ Berrie, the final weeks of the holiday season could make or break the company’s try for a turnaround. After four straight quarterly losses capped last month by a reorganization and job cuts, the Oakland-based manufacturer could use some year-end cheer.

Russ Berrie has been hammered by the shift in consumer preferences away from specialty gift shops, which have been its traditional stronghold, and toward mass-market discounters such as Wal-Mart and Target. Much of the shift has taken place since company founder Russ Berrie died on Christmas Day in 2002.

Russ isn’t alone. Boyds Collection, a Gettysburg, Pennsylvania-based rival, faces the same kind of decline as sales at specialty gift shops tail off. Boyds, a maker of collectible plush bears, filed for chapter 11 bankruptcy protection in October and is in the process of reorganizing.

Originally known for its troll figurines and now famous for its stuffed bears, Russ Berrie designs gift items that are sold mainly through tens of thousands of specialty stores in the U.S. and Europe. The company earlier this year entered the Brazilian market through a partnership with a Brazilian licensing firm.

Russ Berrie’s stock has generally been sliding since early last year. In recent months, the stock has hit a string of 52-week lows and last week traded for around $11.40 share. Stockholders have most recently been responding to the company’s third-quarter loss of $8.6 million on revenue of $83.2 million. A year ago, Russ Berrie earned a $2.3 million third-quarter profit on $79.3 million of revenue.

CEO Andy Gatto blamed the recent loss in part on the decline in sales through specialty gift shops that sell mainly dolls, figurines and other collectibles. Russ Berrie last month launched a plan to beef up sales through mass-market retailers. It cut 50 jobs in its domestic gift operation and will reorganize its warehouses to carry fewer products for the specialty retail market. The company currently has 1,340 employees.

Gatto said the moves were designed to “streamline our infrastructure so that it more closely reflects current business levels, and to re-align our domestic gift operations to better meet the needs of each of our distribution channels.”

The staff cuts and reorganization are expected to generate $15 million in pretax cost-savings once complete. Meanwhile, the restructuring plan will incur a $1.4 million pretax charge for the fourth quarter of 2005 and additional charges of $2.5 million next year.

Bill Hughes, president of the National Association of Gift & Limited Edition Dealers headquartered in Bremen, Georgia, says there’s still plenty of life in the gift-shop distribution channel. “People are returning to more traditional, higher-priced items,” Hughes says.

Hughes and his wife, Kathie, own and operate Kathie’s Christmas and Collectibles in Camp Hill, Pennsylvania, and he expects his holiday sales to be the best in four years. In fact, he says, “Our Boyds business is way up right now.”

If gift shops are moving Boyds Bears again, he adds, Russ Berrie products should follow. And if this holds true, it could be a merry Christmas for Russ Berrie after all.

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