Toys `R’ Us announces first quarter results

As Toys 'R' Us(TRU) turns 50 this year, the giant toy retailer seems to be showing the ravages of middle age. In May, the Paramus, New Jersey-based company announced that first quarter net earnings (US$19.2 million) had dropped more than US$10...
July 1, 1998

As Toys ‘R’ Us(TRU) turns 50 this year, the giant toy retailer seems to be showing the ravages of middle age. In May, the Paramus, New Jersey-based company announced that first quarter net earnings (US$19.2 million) had dropped more than US$10 million compared with 1997 Q1 figures (US$29.4 million), marking the second consecutive quarter its net earnings have declined. Last February it revealed that its costly Concept 2000 retrofit plan for stores had been shelved for further review. And, finally, a recent report, the Top 20 Retailers by Distribution of Dollar Sales 1997, conducted by the NPD Group, showed that TRU had lost half a percentage point of its market share, while discount chains like Wal-Mart and Target continued to make sizable gains.

Analysts agree that the source of most of TRU’s current problems can be traced back to the increased competition it’s facing from the discount chains.

Maureen McGrath, a senior analyst at New York-based Salomon Smith Barney who follows Toys `R Us, says the challenge to TRU’s market position as the dominant toy retailer began five or six years ago.

‘Before, discounters didn’t really feature toys in a broad way. They carried a limited selection throughout the year and then, in the fourth quarter, they would beef up their product assortment and use it to drive traffic through the stores. It wasn’t really a category they were focused on,’ says McGrath. That disinterest, coupled with Toys `R’ Us’s year-round dedication to the category, meant TRU received preferential treatment from toy manufacturers, especially when there was a hot product that was hard to get a hold of. Today, that relationship no longer exists. Discounters, such as Wal-Mart, Kmart and Target, have long since recognized the importance of stocking toys the whole year round as a way of driving traffic into their stores, and have done so by placing extremely low margins on toys. Manufacturers, in turn, have welcomed the new distribution channels, making them less dependent upon TRU to get their toys to market.

One retail analyst, who has worked closely with TRU for more than 15 years, points to a change in consumer attitude toward shopping as a contributing factor to TRU’s sluggish earnings.

‘TRU’s large assortments were a big draw to consumers who used to roam up and down the aisles filling their carts. Today’s harried two-income families don’t enjoy shopping, and less and less want to roam a big store. They want in and they want out- fast. They want specific items and will take no substitutes if a store is out.’

Trying to define itself in this new retail environment is the challenge facing TRU today.

‘TRU does not want to be a mass-market discounter. They don’t want to be Wal-Mart. They don’t want their business to be driven solely on price,’ says McGrath, ‘but they do recognize that they’re going to have to be sharper on pricing, in order to compete more effectively with Wal-Mart and Target, the two chains that are gaining market share.

‘They also feel that they need to increase the service component in their stores. If they can find the right balance between price and service, their customer base should be willing to pay slightly more for the product, so long as they think they’re getting something for their money.’

According to McGrath, there’s evidence that TRU has already begun that soul-searching process, with the announcement last February that it planned to slash its inventory by US$500 million.

Indeed, the tenor of the Toys `R Us Annual Report 1997, released in May, also concurs with her assessment. (Despite many attempts by KidScreen, Toys `R’ Us declined to participate in an interview for this story.) In the section entitled ‘To Our Stockholders,’ C.E.O. Robert Nakasone outlines a number of strategies the company is pursuing in the coming year to boost revenues, such as a continued commitment to creating exclusive products, and the implementation of a new management system, which will be used to increase employee efficiency. The biggestr initiative to date, however, is Nakasone’s plan to broaden TRU’s product offering to include products and services unrelated to toys:

‘Our current vision of being the `preeminent worldwide retailer of toys and juvenile products’ is quite narrow and no longer consistent with how our business is evolving,’ writes Nakasone ‘. . . . By expanding the definition of the merchandise and services we offer, we believe we can capitalize on our established name and image. We plan to expand our vision statement to the following: `Toys `R’ Us . . . The Worldwide Authority on Kids, Families and Fun.’

While stockholders might welcome many of the changes TRU has made recently, McGrath says it’s too early to tell whether or not it has dodged what amounts to a mid-life crisis.

‘I think this is a structural change in the industry, and the sort of landscape that Toys `R’ Us needs to adjust to, which implies that it’s going to take longer than a quarter or two.’

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