The retailer blames heavy price slashing by chains like Wal-Mart.

SPRINGFIELD, Mass. (AP) – KB Toys became the second major casualty of the holiday toy price wars, filing Wednesday for bankruptcy protection and announcing it will close up to 500 stores.

The privately held retailer, which has about 1,300 stores mostly in shopping malls, blamed heavy price-cutting by giant discounters, primarily Wal-Mart, which began reducing prices on hot toys like Hokey Pokey Elmo in October, several weeks earlier than in past Christmas seasons.

“It was brutal,” KB Toys chief executive Michael Glazer said, noting that sales were down double digits this past season.

The Chapter 11 federal bankruptcy filing will enable KB to keep operating while working on a financial reorganization.

The chain, which accounts for about 4 percent to 5 percent of the U.S. toy business and employs about 13,000 people, said it hopes to emerge from bankruptcy protection before the 2004 holiday season.

In early December, FAO Inc., owner of the famed FAO Schwarz toy stores, filed for Chapter 11 for the second time.

Toys “R” Us, the nation’s second-largest toy retailer behind Wal-Mart, also suffered this past holiday season. Earlier this month, it said its overall sales rose less than 1 percent for the critical period, and that sales at U.S. stores open more than a year fell almost 5 percent.

Glazer said the exact number of store closings depends on landlords’ flexibility in offering lower rents. He added that it hasn’t been determined how many jobs will be cut.

To compete, Glazer said KB Toys will “continue to look for opportunities” to develop toys that can’t be found elsewhere, as well as provide good customer service.

Independent toy consultant Chris Byrne said he was “resolutely optimistic” about KB Toys’ future, but said the company will have to “redefine who they are in this marketplace and establish a niche.”

KB built its reputation for value by concentrating on the previous Christmas’ toy hits and off-price and discontinued items, Byrne said. But its small mall stores could not compete with the big retailers, where toys comprise only a fraction of total sales.

The 80-year-old KB Toys, based in Pittsfield, also announced it had secured a $350 million loan from the Fleet Retail Group.

In its petition filed in U.S. Bankruptcy Court in Delaware, the retailer listed $507 million in assets and $461 million in liabilities as of Jan. 3. It said it had about $116 million outstanding for unpaid merchandise.

AP-ES-01-14-04 1858EST