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Toys R Us: What now?
“R” Timeline
56 years of retail history
1948 With a $5,000 investment, Charles Lazarus
opens his first baby furniture store later adding toys.
After numerous attempts to get back in the game, Toys R Us has made a ‘business decision’ that will likely see a significant erosion of its store base or even its eventual disappearance
1952 The R is born. Lazarus opens the Children’s
Supermarket, the first big box specialty chain. Later in the 50s, the name is changed to Toys R Us.
1966 Lazarus sells the four-store chain to Interstate
Department Stores for $7.5 million.
1974 Interstate files bankruptcy. 1978 Toys R Us emerges from bankruptcy as the surviving company with Lazarus as chairman and CEO.
F
by Maria Weiskott
or those waiting for the proverbial other shoe to drop after the tumult of last year’s fourth quarter, the wait is over. It came down with a resounding crash when Toys R Us announced what everyone already knew. The biggest toy specialist stronghold is in trouble—with a capital T, and that rhymes with P, and that stands for predators. Indeed, the retailer that wrote the book on category killing may just fall victim to
1980 TRU sales hit $480 million. During the period
of the 80s, TRU’s sales grow at the average rate of 30 percent a year. It became known as a category killer. Toys R Us approaches a 25 percent market share and pretty much dictates terms to vendors.
made to sell off the toy store business. “In anticipation of the desired separation of these businesses, the board has approved operating the two businesses as separate entities within the existing Toys R Us Inc. corporate structure. The company also plans to initiate a substantial restructuring of its global toy business in an effort to dramatically reduce operating and capital expenses and strengthen that business’s cash flow potential,” Eyler stated. After that the speculation—and speculators—kicked in, offering forecasts that
1983 Kids R Us is launched. 1990 Company sales hit $4.8 billion. In the early 90s,
Lazarus retires as CEO, but continues as chairman.
1995 Michael Goldstein takes over as CEO. Mass merchants, like Wal-Mart, Kmart and Target, become visibly more aggressive in pursuing the toy category in ways they know best: pricing. Competition intensifies.
1996 Following the TRU and KRU formulas, Babies R
Us is born. eToys, an online competitor, launches operations, fighting for share against TRU and the discounters. Along with the presence of Amazon.com, TRU is convinced to launch its own online business.
1998 Toysrus.com runs into online disaster. During the
height of the holiday selling period, the etailer fails to meet demand. Servers crash, fulfillment lags leaving thousands of customers without their orders. TRU loses its No. 1 market share standing to Wal-Mart, Goldstein is forced out and Robert Nakesone steps in to lead the firm.
2000 With sales and profits under pressure, Nakesone
steps aside. Former FAO Schwarz CEO John Eyler steps up to lead TRU. He brings new merchandising and marketing initiatives to the company.
2001 TRU’s flagship Times Square, New York store
opens.
2003 TRU signs an agreement to become the exclusive in-store toy retailer for Albertson’s supermarkets, an obvious response to Wal-Mart’s growing dominance of both categories. Kids R Us is shuttered. 2004 Even after additional store resets and redesigns, experimental units and changes in format and marketing, TRU announces it may sell off its toy store business, leaving its still growing Babies R Us business to carry on.
its own lessons, in the face of spiraling competition from mass merchants’ increasing encroachment into toy territory. Whatever the ultimate result of John Eyler’s announcement last month—termed an update on the company’s strategic review— one thing became painfully clear: The party’s over for the great big box Charlie Lazarus built. The present corporation will split up, one way or another. CEO Eyler indicated that he remained steadfastly committed to returning “shareholder value”— an often deadly euphemism to struggling companies and, particularly, retailers. And, to do so, he said the corporation’s still-growing Babies R Us division would get the lion’s share of corporate resources and talent, while attempts may be
ranged from toy industry doomsday scenarios to little more than a “no big deal, life goes on” spin on the news. But it is a big deal. “Whenever there is less competition, it is bad for manufacturers,” says Neil Stern, senior partner at Chicago-based McMillan/ Doolittle, a retail consulting firm. If TRU disappears from the landscape, he tells PLAYTHINGS, there will definitely be a loss. “What you lose is the ability to show new product, he explains, referring to the impact fewer doors can have on toy manufacturers. The marketplace without TRU is not in a position to show as much variety, Stern says. “If TRU does in fact sell its toy business I really see it hurting the manufacturers the most,”
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agrees Joe Diaz, president of Learning Express, one of the few remaining toy specialist chains. “Less money will be put into research and development because there will be no point in working on a toy that a Wal-Mart or Target buyer wouldn’t be interested in,” he told playthings.com when TRU announced its intentions August 11. Many in the industry had speculated about this breakdown, seeing TRU post quarter after quarter of loss in everything but the Babies R Us stores. Focusing on the portion of the business that’s doing well is smart business, says Diaz. Other industry experts concur. It’s an area where the behemoth mass marketers may not be able to tackle as deftly as toys. “The business isn’t seasonal,” explains Mike Rosenberg, managing director, Barrington Associates, a Los Angeles-based investment banking firm. While Wal-Mart or Target can increase floor space on a seasonal basis to accommodate toy selling, they won’t be able to do it with ease in the baby furnishings category. “They won’t have as easy a time killing this category as they did with
toys,” he tells PLAYTHINGS. And Eyler said as much in his statement, noting that the series of steps being taken “reflect the fact that our global toy business and our Babies R Us business op-
CEO John Eyler
erate in distinct markets, and are at fundamentally different phases in their growth cycle. Consequently, by ultimately operating them as separate entities, we will provide a better opportunity for Babies R Us to continue its healthy growth.” At the same time, the CEO said the separation is expected to “facilitate the execution of a restructured—and substantially leaner and more focused—global toy business that we believe can generate significant cash.” A downsizing of the toy portion of a restructured TRU is seen as a “a reallocation of retail market share within the domestic toy industry,” according to A.G. Edwards toy analyst Timothy Conder. He says that the possible closure of up to 100 TRU underperforming locations does not necessarily mean that overall industry distribution will be diminished. “What is occurring,” Conder says, is that retail market share is continuing a multi-year shift from Toys R Us to more cost effective retailers,” like Wal-Mart and Target. He adds that in some markets, TRU stores were “over saturated and that rev-
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‘If TRU does sell its toy business I really see it hurting manufacturers the most. Less money will be put into R&D because there will be no point in working on a toy that a Wal-Mart or Target buyer wouldn’t be interested in.’
—Joe Diaz, Learning Express, enue from terminated locations will not all flow to competitors, but could be captured to a degree by remaining Toys R Us locations. Conder says the situation is reminiscent of the “early 1990s when TRU forced several toy competitors at the time—Child World, Kiddie City—out of business.” The same thing is occurring now, he notes, “only with other players and different roles.” But, Conder does caution that the scenario he presents assumes that the company does not exit the retail toy business. The prospect of TRU exiting the toy business does present a whole other set of scenarios, including speculation about who would buy it. “My bet is that it would be a private equity company,” Barrington’s Rosenberg tells PLAYTHINGS. “You don’t just see the potential of $9 billion disappearing.” He adds that a “transaction would not be prohibitively expensive in the private equity community. There’s definitely a deal there,” he emphasizes, adding that an equity fund would be more aggressive in getting rid of non-performing locations. McMillan/Doolittle’s Stern envisions a similar possibility. “It could be a boost to independents and to specialty,” he says, closings will be made before the end of the fourth quarter holiday selling period. To do so, would very obviously be counter-productive. At the time of its initial announcemen, the company said it would have no further comment before its delayed August 23 earnings conference call. The call came, TRU reported its results, then “hung up” without taking its usual round of analysts’ questions. In that call, TRU delivered another bag of, at best, mixed financial news: stunted sales, declining comps and a $192 million operating loss. That pitted against a $61 million net profit, mostly on the strength of accounting changes and a reversal of income tax set asides. And--the company mentioned--it was sitting on $1.1 billion in cash. If there was any doubt what that meant, Eyler quickly removed it. “Maintaining an exceptionally strong balance sheet, ample liquidity and significant financial flexibility continue to be among Toys R Us Inc.’s highest priorities,” he said.
—Brent Felgner contributed to this story
TRU’s flagship Times Square, New York
store has been a 100,000-sq.-ft. showpiece
adding that there would be further differentiation in the toy marketplace. Meanwhile, TRU has been careful not to disclose specific plans. The company has told investors, vendors, and employees that no decisions about store
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