Toys R Us’ Plan for Mega-Store Raises Doubts on Wall St.
Toys R Us Inc. is no longer the nation’s top toy seller, but it still plans to be the biggest in one respect: It announced Tuesday that it will open the world’s largest toy store in New York’s busiest playground, Times Square.
The new flagship, scheduled to open next summer on Broadway between 44th and 45th streets, will feature a 60-foot Ferris wheel, glass exterior walls, a life-size dollhouse and a cafe that hangs from the ceiling and overlooks 101,000 square feet of games, gadgets and playthings.
While Toys R Us is betting that bigger is better, especially in the Big Apple, other toy sellers are making inroads by going in the opposite direction.
Internet sellers, such as EToys Inc., woo tired shoppers with a promise of easy, at-home accessibility. At the same time, discounters, including Target and Wal-Mart, tout low prices and a manageable selection of products. Wal-Mart has been so successful in that strategy that in 1999 it knocked Toys R Us from first place to become the nation’s top toy seller.
“The most important part of this store is setting the imagery for this company that tells the world that Toys R Us is about to embark on its second growth phase,” Toys R Us Chief Executive John Eyler said in an interview Tuesday. “This will be so special that no matter who looks at it, they will come away being entertained and excited, and also really impressed by the company that can achieve this kind of accomplishment.”
Some on Wall Street, however, asked whether shoppers really want that much excitement. Moreover, some ask whether a multimillion-dollar flagship store is the best use of the ailing chain’s resources.
“It’s rare that the impact of an initiative like this is sufficient to drive a business,” said one Wall Street watcher. “Usually, a flagship store is an affirmation of success, not an aspiration for success.”
Eyler declined to give the cost of the new Toys R Us store, which he expects will attract 20 million visitors annually.
But according to the company’s filings with the Securities and Exchange Commission, the flagship’s price tag might have little effect. Even with declining earnings, Toys R Us ended last year with $584 million in cash on hand--up $174 million from the previous year.
Supporters applaud Eyler’s attempt to demand attention and respect for what is still the country’s largest chain of specialty toy stores. To that end, Eyler said the telegenic new store will be constructed with state-of-the-art broadcast wiring--giving toy makers yet another reason to launch products in the new Toys R Us.
Eyler, who joined the Paramus, N.J.-based chain in January, came from a small chain with the ultimate in flagship toy stores: FAO Schwarz. Smack in midtown Manhattan, FAO Schwarz solidified its position as the ultimate kid retailer with a dazzling display of real-size stuffed animals, ride-on train sets and other one-of-a-kind toy wonders.
Toys R Us, however, which has 1,553 stores, has a bigger legacy and greater challenges.
After suffering a dismal holiday shopping season that was marked by delivery delays for online orders and by lackluster in-store sales, Toys R Us posted an 11% drop in operating profit to $334 million for 1999, from $376 million a year before. Sales for the year were up only slightly to $5 billion.
William Nygren, the portfolio manager of two Oakmark funds that together held more than 10.6 million Toys R Us shares as of March 31, said a new flagship store could be positive for the company as long as the effort in Times Square accompanies other improvements.
“Toys R Us has two problems right now--they don’t deliver the right shopping experience and there’s an image problem,” Nygren said. “The important thing is combining this with making the right changes across the chain.
“I think this focuses directly on the image issue and will increase the chances that customers will give remodeled Toys R Us stores a chance.”
Eyler’s plans for the chain include remodeling each of its more than 708 domestic Toys R Us stores by the 2002 holiday season, increasing staff and cutting 20,000 products in order to stock more of the most popular toys.
Amy Ryan, an analyst with Prudential Securities in New York, said the new flagship could be just what the company needs--a notion she believes even more strongly after visiting one of the new Toys R Us stores. “This is part of an image boost,” Ryan said. “If that store I saw is any indication, John Eyler might really be on his way to a turnaround.”
In other news, a federal appeals court ruled against a bid by Toys R Us to reverse a Federal Trade Commission finding that the company kept the hottest toys from warehouse-chain rivals.
The 7th U.S. Circuit Court of Appeals upheld the FTC’s ruling that Toys R Us used its market power to restrict toy manufacturers from selling certain products to such chains as Costco Cos.--meaning that Toys R Us would not have to lower its prices to compete with lower-cost competitors.
Representatives of the company could not be reached for comment.
Times wire services were used in compiling this report.
