Competitive Intelligence

Toys-R-Us... or R They?

Whether, as John Eyler, chairman and chief executive officer of Toys R Us, said that, the global toy and Babies "R" Us businesses are at "fundamentally different phases in their growth cycle," and that this separation would give the baby business more opportunity to continue its healthy growth, it's still a factor of Wal-Mart's dominance in retail strategy that it could force what was once the preeminent toy retailer of all time to essentially go out of business.

Toys "R" Us Inc., battered by price wars from discounters, particularly Wal-Mart, is considering getting out of the toy business.

The nation's second-largest toy retailer behind Wal-Mart Stores Inc. announced plans Wednesday to restructure its toy business, but said it is considering selling the business outright as part of an effort to dramatically reduce operating and capital expenses.

The $11.6 billion company is also pursuing a possible spinoff of its fast-growing Babies "R" Us, whose 200 stores sell furniture, including cribs and bedding, as well as accessories. The company will begin operating the toy and baby business as separate entities in the meantime.

The Babies "R" Us division has been the company's growth vehicle, and has not been as vulnerable to discounters, Standard & Poor's credit analyst Diane Shand said in an S&P statement affirming its ratings on Toys "R" Us remained on CreditWatch with negative implications.

The company's U.S. toy division, however, has been inconsistent since the mid-1990s, when Wal-Mart ramped up its toy department as it also dramatically expanded the number of stores.

"Traditional toys have decreased in importance, as children are turning to video games, computer software, sporting goods, and music for entertainment at younger ages," Shand said.

Babies "R" Us, which represents 15 percent of the company's total revenues, posted sales of $1.76 billion, up nearly 11 percent, for the year ended Jan. 31. Meanwhile, the Toys "R" Us' U.S. revenues fell 4 percent to $6.48 billion. Toys "R" Us has 683 toy stores in the United States and 579 international toy stores. It also sells through its Internet sites.

The announcement "is extremely positive for investors, as one of the critical pieces to unlocking shareholder value in (Toys "R" Us) is separating its crown jewel, Babies "R" Us," said Mark Rowen, an analyst at Prudential Equity Group Inc.

It is anticipated that today's announcement comes preceeding some very, very weak results:

Toys "R" Us said Wednesday it would delay releasing its second quarter 2004 earnings until Aug. 23. The figures were to be released Monday. In the first quarter, the company's profit declined 48 percent in its fourth fiscal quarter, which ended Jan. 31 and covered a disappointing holiday sales season. Disappointing results continued into the first quarter, with the retailer posting a wider-than-expected loss and lower sales.

Poor holiday 2003 results helped lead to the bankruptcies of FAO Schwarz and K-B Toys.

Toys "R" Us has been retrenching for much of the last year to improve its bottom line. In November, it said it would close 146 freestanding Kids "R" Us clothing chain and 36 Imaginarium specialty toy stores, which sold educational toys, cutting up to 3,800 U.S. jobs.

So, maybe toys "R" not us? After the earnings release in a few days we'll see... but it'll be the coming holiday season, when we'll truly get to find out.

- Arik

Posted by Arik Johnson at August 11, 2004 10:23 AM | TrackBack