Toys R Us CEO Resigns; ‘Differing Views’ Cited

Toys R Us Chief Executive Robert C. Nakasone abruptly resigned Thursday because he and the board of directors had “differing views regarding the direction of the company,” the board said, jolting the troubled retailer during its toughest battle since the company first dominated the industry.

Michael Goldstein, chairman and a former chief executive of the company, will serve as acting CEO while the board searches for Nakasone’s replacement, the company said in a news release. Toys R Us would not elaborate on the reason for his departure and Nakasone could not be reached for comment.

Nakasone’s resignation, after just a year and a half in the job, follows a particularly rocky year for the company as both the toy industry in general and Toys R Us in particular suffered seismic shifts in who purchases toys and where they do it.

Consumers have demonstrated that price or educational value is more important than the broad selection offered by stores such as Toys R Us. At the same time, children are turning away from traditional toys in favor of computer games and other high-tech offerings.

Although the chain, with almost 1,500 stores, is the dominant specialty-toy retailer, it lost its position last year as the country’s No. 1 toy seller to discounter Wal-Mart. More specialized educational toy store chains have also benefited. Meanwhile, the crucially important Christmas season last year brought less than a lump of coal for Toys R Us, as the retailer watched same-store sales drop 7%, compared with the year before.

Then, just months after promising to be leader in the online toy market by the fourth quarter of this year, Toys R Us faced a series of embarrassing public set-backs in its bid to unseat online toy king EToys.

First, Robert Moog, the store’s top choice to lead the online venture, backed out of the deal. At the time, Toys R Us said Moog was unable to extricate himself from another contract; Moog has since said he was not convinced of the company’s commitment to the venture.

Then, two weeks after naming John Barbour of Hasbro Inc. to the post, Toys R Us said an important partner in the e-commerce deal was leaving. Benchmark Capital, the venture capital firm behind Internet auction giant EBay, withdrew from its portion of Toysrus.com in a dispute over how much of the new business would be apportioned to Benchmark in exchange for its investment. Benchmark was expected to bring to the deal Internet credibility and online-savvy executives to run the operation, in addition to its $10-million-plus investment.

Long disparaged for its aging stores and a dearth of customer service, Toys R Us embarked upon a restructuring program under Nakasone that included full-scale store remodeling along with cost cutting, store closings and an inventory reduction. Calling the old format “claustrophobic,” Nakasone ushered in wide aisles, new departments organized by age and shorter shelves to replace the old, ceiling-high stacks of toys and games.

But even those efforts were seen as too slow and too late by some analysts. A first store concept proved a disappointment, some said, delaying the remodel even more as the company tried to work the ideas into a new design.

“No question, Toys R Us is right up there with the worst of them when it comes to having a miserable retail experience,” said Barry Parr, director of consumer e-commerce for International Data Corp. “But, the truth is, consumers will put up with a lot of stuff if they can get low prices and a good selection.”

Toys R Us shares rose 50 cents to $16 in after-hours trading Thursday on news of Nakasone’s resignation. The stock has plunged from $24.50 in early June to a recent low of $14.75. Second-quarter results released last week showed sales were up 4%, although earnings were down 14%, compared with the same period a year ago.

Before joining the toy retailer in 1985 as president of the stores’ division, Nakasone was vice president of the Midwest division of Jewel, a Chicago-based supermarket chain that was sold in 1984 to American Stores Co.

His arrival at Toys R Us coincided with another restructuring, which brought in a slew of executives from outside the industry, including Goldstein, who had been an executive at Lerner Stores.

“You look at the company’s performance over the past however many years and you would have to say that something like this may have been brewing, but on the other hand, I didn’t expect it,” said toy industry analyst Sean McGowan at Gerard Klauer Mattison in New York. “I would have thought if there was going to be a change, it wouldn’t have come this year and it only would have come if Christmas was disappointing.”

Next year is likely to prove even more difficult, McGowan said. Without the bump offered by “Star Wars” products and strong video-game sales in 1999, Toys R Us could face another lean year.

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Struggling Player

Toys R Us’ earnings peaked in 1995, and the company has been struggling since to stay on track. A major reorganization last year resulted in a net loss. Net income in millions:

Fiscal years ending Jan. 31

‘95: $532

‘96: $148

‘97: $427

‘98: $490

‘99: -$132

Fiscal half of fiscal 2000: $29

Source: Bloomberg News