No Toys At Toys 'R' Us?

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.

John Eyler, chairman and chief executive officer, said the global toy and Babies "R" Us businesses are at "fundamentally different phases in their growth cycle," and separation would give the baby business more opportunity to continue its healthy growth.

Company officials declined to elaborate on their plans.

Richard Hastings, an analyst with Bernard Sands, was critical of the plan and said the Toys "R" Us announcement "is not as transparent as we would prefer."

The big question is, who would buy the toy business, given that the industry has been reduced to cutthroat price wars?

Hastings said a buyer, should one emerge, would be more likely to be a private equity investment than a public company, as happened with rival FAO Schwarz. He could not estimate a price.

"They seem to be throwing this up in the air to see where it lands," Hastings said. "This sounds like the aftermath of 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.

Regarding the latest plan, Eyler said, "whatever form the separation takes, these steps should facilitate the execution of a restructured — and substantially leaner and more focused — global toy business that we believe can generate significant cash."

Toys "R" Us said it planned to "substantially restructure" the company's Wayne headquarters, reducing operating expenses in the headquarters and U.S. toy business by more than $125 million by fiscal 2005 as compared to fiscal 2003.

Spokeswoman Susan McLaughlin declined to say if layoffs are contemplated. The company said it has recorded severance and other related charges of approximately $14 million which will be reflected in the second quarter results, and additional charges will occur in subsequent quarters.

The company had 65,000 employees at the end of January.

Toys "R" Us has hired Credit Suisse First Boston to advise it on any sale. The possible retreat comes after Toys "R" Us has spent millions to renovate its stores and sought exclusive rights to certain toys to differentiate itself from the discounters, whom it couldn't beat on price.

"How do you make a profit in a business where margins are so squeezed?" said New York-based independent toy consultant Chris Byrne. "Wal-Mart really has functioned as a category killer in this."

"Ironically, this is what Toys "R" Us was doing in the '60s and '70s, as they were trumping all the regional toy chains," Byrne said, citing Lionel Leisure and Kiddie City.

Byrne said buyers for the global toy business would be scarce, considering the company's real estate liability and debt.

Toys "R" Us said it was focusing on preparing its toy stores for the upcoming holiday season and did not expect to make a decision before then on any store closings.

"Customers should know that we will operate our toy business with renewed energy," Eyler said in the release.