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Toys R Us taking steps to be competitive with discounters

Toys R Us supervisor Linda Heppner in North Bergen, N.J., shows off some of the retailer's exclusive toys, including a scale-model remote-control Hummer.
Toys R Us supervisor Linda Heppner in North Bergen, N.J., shows off some of the retailer's exclusive toys, including a scale-model remote-control Hummer.
Mike Derer, Associated Press

NEW YORK — Toys R Us Inc. is determined not to let Wal-Mart Stores Inc. spoil its holiday season.

With its future dependent on the outcome of 2004 holiday shopping, Toys R Us is focusing more on setting itself apart from discounters that have battered its sales in recent years. So the nation's second-largest toy retailer is stocking its shelves earlier than it did last year, has more exclusive merchandise and is making its stores look more interesting and inviting.

"We are looking at making the shopping experience magical, where consumers will find things in the store they don't expect," said John Barbour, who became president of Toys R Us' U.S. stores in August as part of the company's restructuring. He had been president of Toys R Us International.

And, he added in a telephone interview, "We are not going to be embarrassed by price."

Toys R Us, based in Wayne, N.J., has steadily lost market share to discounters, particularly Wal-Mart, which carry many of the same toys but at lower prices. In August, Toys R Us, whose profits plunged more than 60 percent last year, said it was considering selling its toy business; how it fares this holiday season will be a big factor in its decision.

The season could turn out to be another big disappointment if Wal-Mart again slashes prices as deep and as early as it did last year, a move that, in addition to squeezing Toys R Us, contributed to the bankruptcies of FAO Schwarz and K-B Toys Inc. It's also expected that discounter Target Corp. will be even more aggressive on price.

To lure shoppers, Toys R Us is selling toys that can't be found elsewhere, having worked with toy makers to develop more exclusive products. Among them are a miniature Hummer from Little Tykes and a fashion mall for Barbie from Mattel.

Toys R Us is also hoping to recharge sales of past holiday hits such as Fisher-Price's Hokey Pokey Elmo and Hasbro Inc.'s Go Go My Walking Pup, an interactive plush dog, by becoming the exclusive seller.

Barbour said he feels encouraged by what he believes are "a lot more good toys" this season compared with a year ago. They include personal video players for preteens, more electronic learning toys and modern versions of retro products like Schwinn's Sting-Ray bike.

Despite its market share losses, Toys R Us does have many fans. Melody Campbell-Goeken, of San Antonio, said that although prices are lower at Wal-Mart and Target, she expects to do most of her holiday toy shopping for her 8-year-old son at Toys R Us because the retailer offers "bigger variety of the same type of products."

Marty Kotis, of Greensboro, N.C., who has a 19-month-old son, agreed, noting that "being able to choose from all the different options is a lot more important than getting the best price." Last holiday season, Kotis did the bulk of his shopping at Toys R Us and expects to do the same this year.

Analysts say its merchandise selection may be a key to Toys R Us' future — it may need to be less of a mass merchant and more of a specialty toy store.

"I still believe strongly that there is a great opportunity for a smaller version" of Toys R Us, said Bob Kerson, chairman of Kerson Partners Ltd., an executive search firm in Greenwich, Conn., whose clients have included the toy retailer.

That would require further changes at its stores, including a greater focus on customer service. While Toys R Us has tried to improve service, analysts say it still has work to do, including cleaning up its untidy stores.

The sale of the toy business is one of several options Toys R Us is considering to lower operating and capital expenses. It's also looking at a possible spinoff of its fast-growing Babies "R" Us, which sells furniture and accessories.

Whether its toy business is sold or not, no one expects Toys R Us to disappear, although analysts anticipate that it will continue to retrench, possibly closing up to 150 U.S. stores next year. Toys R Us currently operates more than 680 U.S. stores and more than 580 toy stores in other countries.

Last November, the merchant said it would close the 146-store Kids R Us clothing chain and 36 Imaginarium special toy stores, which sold educational toys. Toys R Us is not expected to announce its plans for the future for another few months.

The company's cutbacks coincide with the overall toy industry's restructuring in reaction to the price wars waged by discounters. FAO Schwarz's Las Vegas and New York stores, purchased by investment firm D.E. Shaw & Co. Inc., are expected to reopen later this year as retooled high-end toy boutiques. Meanwhile, K-B Toys is closing several hundred stores.

For the fiscal 2003 year, Toys R Us' earnings fell to $88 million, or 41 cents per share, from $229 million, or $1.09 per share, in 2002. Revenues were $11.6 billion, compared with $11.3 billion in the previous year.

For the first half of fiscal 2004, the company earned $33 million, or 15 cents a share, compared to a loss of $37 million, or 17 cents a share, a year earlier. Sales fell 3 percent to $4.08 billion from $4.2 billion.

Toys R Us' stock has fallen close to 60 percent since its peak in 1993, when shares were trading at about $40.

Wal-Mart, which unseated Toys R Us as the nation's No. 1 toy seller in the late 1990s, is expected to have 25 percent of the toy industry's market share this year, while Toys R Us should have about 16 percent or 17 percent, according to Sean McGowan, an analyst at Harris Nesbitt. Target is third at 12 percent, while Kmart Holding Corp. ranks a distant fourth place, with market share in the low to mid-single digits.

Toy manufacturers can't afford to lose Toys R Us. Unlike Wal-Mart and other discounters, Toys R Us buys more of a variety of merchandise, and it tests toys year-round, giving suppliers a better idea of what products are likely to succeed.

"They have the widest array of products," said Tim Kilpin, a senior vice president at Mattel.

But what happens to Toys R Us this holiday season may well come down to price. McGowan said the company needs to do a better job than it did last year, when it was slow to react to Wal-Mart's price cutting.

And nine out of 10 consumers surveyed by the marketing research firm The NPD Group said they're planning to spend the same or less this holiday season than they did last year, which means price will be an issue for most shoppers.

But so far this fall, it appear that the toy retailer has been more aggressive.

Based on a recent spot check of 80 toys by Harris Nesbitt, Toys R Us' prices were only 1.2 percent higher than Wal-Mart's and 1.8 percent higher than Target's. A year ago at this time, Toys R Us' prices were about 5 percent to 7 percent higher than the discounters.