a shame that the puppy lost ITS toy?

The sentence "It's a shame that the puppy lost its toy" is grammatically correct.

Here's why:

* "Its" is the possessive pronoun for "it," and it refers to the puppy. Since the toy belongs to the puppy, we use "its" to show possession.

* "It's" is a contraction for "it is," and it's not appropriate here.

Let me know if you have any more grammar questions!