(The following story by Wall Street Journal reporters Joseph Pereira and Ethan Smith appeared on the Kansas City Star website on November 23.)
NEW YORK — Christmas is turning into a real train wreck for Lionel LLC, the 104-year-old model train maker that filed for federal bankruptcy court protection last week.
Lionel has the license to produce a replica of the locomotive in “The Polar Express,” Warner Bros.’ big-budget holiday movie that recently made its debut
The movie was supposed to rekindle the train hobby among youngsters more fixed these days on video games. Instead, the movie has been a disappointment at the box office, and hopes for a revival of the nostalgic genre seem dashed by Lionel’s filing for protection from creditors Nov. 15 in federal bankruptcy court in New York’s Southern District.
Lionel said it filed because it couldn’t pay a $40.8 million court judgment against it after a court found it misused a rival’s train blueprints. The judgment “has forced us to take this action,” said Jerry Calabrese, Lionel’s chief executive. The bankruptcy filing will give the company time to appeal the court decision and “will enable us to create, manufacture and ship our products in our normal and usual way,” he added.
But at a minimum, the filing will hobble Lionel’s efforts to get maximum advantage out of its “Polar Express” model. Despite the movie’s poor ticket sales so far, the $249 train sets have sold out in many stores. Yet getting more inventory into stores in time to take advantage of movie publicity will take money Lionel may not have.
The bankruptcy filing followed the dismissal in September of Lionel’s two top executives, who were replaced as part of a broader management shake-up in which 18 midlevel managers also lost their jobs. Driving the changes was Wellspring Capital Management LLC, a New York investment firm that represents the heirs of Martin S. Davis, the former chairman of the old Gulf + Western, later known as Paramount Communications.
Calabrese, Lionel’s new chief executive, declined to comment specifically on reasons for the executive overhaul; a spokeswoman for Wellspring also declined to comment. People familiar with the company said the owners were upset with the company’s inability to reach younger train enthusiasts, particularly those who might be interested in “The Polar Express.” The company and retailers also underestimated demand for the “Polar Express” model, leaving many store shelves empty six weeks before Christmas.
Train enthusiasts “were buying it before the movie was even out,” said Neil Besougloff, editor of Classic Toy Trains magazine. As a result, many nonenthusiasts — especially parents out shopping for Christmas presents — now are out of luck. The setback is a missed marketing moment, in which Lionel might have reinvigorated its customer base.
George E. Hoffer, an economics professor at Virginia Commonwealth University, said the “Polar Express” model was a big opportunity for Lionel to reach young children, many of whom have put away their Brio and wooden train sets for good and are probably not going to get back into trains again.
Hoffer, a model train collector and a longtime follower of Lionel, testified on behalf of Lionel’s rival and adversary in the design-piracy case, MTH Electric Trains Inc., also known as Mike’s Train House.
MTH, based in Columbia, Md., has been responsible for much of the innovation in model trains over the past 20 years: It added microchips that improved sound effects, it synchronized smoke-spouting, and it introduced other special features, such as electronically operated depots where water could be loaded onto stopped trains.
Mike Wolf, owner of MTH, said his company had been hurt badly by the Lionel piracy, leading the company to cut the jobs of more than half of its staff over the past four years. Revenue declined from $60 million to $30 million. If Lionel can avoid paying the $40.8 million judgment, he said, the company will be in even worse trouble. “This is a matter of survival for us,” Wolf said.
Wolf admits that MTH exists in the shadow of Lionel’s better-known brand name. The lawsuit has created a rift among many collectors, many of whom are “pretty emotional” about their loyalties. “There are a lot of Lionel train collectors who tell me that I should have never have filed the lawsuit and that I’m the bad guy,” Wolf says.