Season of Change at Toys R Us
This holiday season, Toys R Us Inc. hopes to see its trademark Geoffrey Giraffe cast in the role of Santa Claus, spreading good cheer to children--and investors--with exciting stores, full shelves, strong service and on-time deliveries.
That might sound like the minimum for a toy retailer, but for the nation’s largest specialty toy store, it would be a big change from last year, when out-of-stock toys and online order snafus had Geoffrey Giraffe looking more like the Grinch Who Stole Christmas.
How bad was it? Last year, Paramus, N.J.-based Toys R Us watched its earnings plummet 11% as compared with a year earlier, even though net sales were up 6%. During the all-important fourth quarter, during which toy retailers reap the bulk of their profit, Toys R Us’ earnings fell 15% as compared with the year before, even though net sales increased 2%.
Shareholders responded in kind. The company’s stock price sank to $9.75 at the end of January, compared with a high of $43 on the New York Stock Exchange in 1993. It closed at $17.38 on Friday.
But six months after former FAO Schwarz chief John Eyler took over as chief executive at Toys R Us, some important Wall Street players are cautiously optimistic about the chain’s long-term future, citing Eyler’s merchandising background and common-sense approach to rebuilding.
“Many of the goals that Toys R Us has had in terms of improving the shopping experience within the Toys R Us stores remain the same,” said Amy Ryan, a retail analyst with Prudential Securities in New York. “We believe that under Mr. Eyler’s direction, the outcome may be ultimately different: market-share gains and earnings-per-share growth, rather than market-share losses and earnings-per-share declines.”
In part, some base an optimistic outlook on the company’s relatively strong financial position. Even after a rough few years of slowing sales and an erosion of market share, Toys R Us boasts a healthy balance sheet, a slowly improving stock price and arguably the best-known brand name in the toy store business.
“I came to the company because I really believe this is a tremendously sound business that had lost its way a bit over the past few years,” Eyler said this year. “The company has a brand that is synonymous with this business and the financial resources for any strategic initiatives. When you have those two things, anything is possible.
First, however, the company has to overcome a reputation for labyrinthine stores, poor service and management turmoil that has for years conspired to drag down Geoffrey Giraffe’s fortunes.
The Toys R Us store familiar to many shoppers looks a lot like the cavernous store on La Cienega Boulevard in Los Angeles, with its jumbled mess of goods at the entryway, aisle contents that are a mystery--many rows are missing signs--and seemingly nonexistent store personnel.
And Eyler knows it.
So for starters, the company’s plans include a face-lift for each of its more than 708 domestic Toys R Us stores by the 2002 holiday season.
By October, the company anticipates finishing 170 new and upgraded stores, complete with new educational store-within-a-store boutiques, an Animal Alley stuffed-toy zone, a more navigable floor plan and an end to the sky-high shelving that helped Toys R Us make its mark.
Although some industry analysts are enthusiastic about the new layout, many also note that it has taken the chain several tries to hit on the right formula. The newest concepts follow an initial redesign in 1996 and a second make-over in 1998.
The goal is to make all the stores a step above the redesigned Burbank store, which will eventually get another face-lift. There, items are more accessible and everyone seems to be having fun. In one part of the store, children sit on a carpet and watch videos while their parents shop; a small boy whizzes by on a tricycle.
Poor store layout, though, has not been Toys R Us’ only problem. In recent years, children have grown out of traditional toys at ever-younger ages and into video and electronic games--a weaker area for Toys R Us.
Adding to the chain’s problems, Toys R Us faced an onslaught of competition from top online toy sellers, such as EToys Inc., and traditional mass merchants. The company had already lost its mantle of No. 1 toy seller to discount giant Wal-Mart Stores Inc. in 1998.
So even Toys R Us was shocked when its online site struck gold. Toysrus.com was so swamped with orders last year that executives were forced to warn a few days before Christmas that some of Santa’s gifts wouldn’t make it out of the North Pole in time for the holiday--a failure of the company’s most important mission during its biggest season.
“I’ve had more shareholders threaten to sell our fund over this holding than anything else in my career,” said William Nygren, portfolio manager for two Oakmark funds that together held more than a 10.6 million Toys R Us shares as of March 31, the funds’ most recent reports.
“It shows what the consumer is thinking,” Nygren said. “Our argument is that the consumer is rooted in history, rather than what the future can be for Toys R Us.”
To improve the store experience, Eyler said he expects to cut 20,000 items in favor of stocking more of the most popular items, a change most customers will hardly notice in the stores’ giant selection.
But even that modest change could go a ways toward fixing an embarrassing problem from last year: running out of the toys that consumers wanted and missing out on about $150 million in sales in the process, said Ryan of Prudential.
Winter sales numbers, even Eyler acknowledged, offer an example of the empty-shelf problem. Sales last Christmas season began with a 13% same-store sales increase in the third quarter, then fell to a single-digit gain in November and a drop-off into negative territory for December sales.
“The company has a heritage of buying everything made,” Eyler said. “Such a diffuse assortment [means] that you have a little bit of everything and not enough depth in key products.”
Among the key products Eyler hopes to increase are exclusive toys, a strategy he employed at FAO Schwarz to offer shoppers special and unique items. The Toys R Us exclusives, including a new line of Animal Planet toys and a Nickelodeon boutique on Toysrus.com, are sold at a higher margin, another reason Eyler plans to increase the amount of exclusives to as much as 12% to 13% of the total product mix, up from 5% today.
By Christmas 2001, Eyler said, he anticipates that 20% of the stores’ products will be available only at Toys R Us.
In response to years of consumer complaints about inefficient help, Toys R Us plans to boost staff hours 25% and pay specialized sellers as much as $10 to $12 an hour, as compared with today’s $6 to $8, Merrill Lynch analyst Peter Caruso wrote in a report to clients. Those costs will be paid for with savings from reductions in general operating expenses, Caruso said.
And as toys get more complicated, Eyler wants store personnel to teach parents how they work. He plans about 20 hours a week of in-store toy demonstrations, using 10 to 15 times as many products as before. During the holidays, the demonstrations will probably run 60 to 70 hours a week.
The company employs 76,000 people in 1,555 stores worldwide, including Imaginarium stores and Babies R Us, which became the biggest chain of infant shops in the country after Toys R Us’ 1996 acquisition of Baby Superstore. Toysrus.com and Imaginarium.com are also part of the stable, as is the under-performing Kids R Us.
The changes are geared toward bringing excitement back into the stores--an oft-repeated retail mantra, especially given consumers’ easy access to online shopping. For Toys R Us, that means, in part, a return to its past.
When Charles Lazarus opened his first store in 1948, up through the early 1990s, Toys R Us offered something the small toy stores and department stores could not: huge selection at discount prices.
By the time Lazarus gave the stores their current name in 1978, Toys R Us’ earnings were growing 40% a year. Toys R Us forced the closure of many overpriced department store toy divisions and sent rival chains, including Child World and Lionel, scurrying into bankruptcy. By the mid-1990s, however, the novelty had worn off to reveal that the company’s expansion had come at the expense of store upkeep.
As Toys R Us shoppers compared stories of frightfully bad service, fancy toy stores such as Zany Brainy lured higher-income parents with educational offerings and stores such as Target seized the opportunity to offer harried parents one-stop shopping.
Nygren, of the Oakmark funds, says Toys R Us’ non-core assets comprise much of the stock’s market value.
Those parts include the “dot-com” site, a partnership with Tokyo-based investment giant Softbank Inc., and 48% of the successful Toys R Us-Japan. The Japanese company sold 32% of its shares in a May initial public offering to net $315 million before taxes.
Toys R Us also claims a booming babies division, with $1 billion in sales and same-store sales up 10% for the first quarter over the year-ago quarter--after a double-digit year-over-year increase in 1999.
The company has also pledged to fix last year’s Internet glitches, doubling the number of workers at Toysrus.com over the next year to 600 employees and opening new offices in New Jersey and San Francisco.
Toys R Us hopes a new advertising campaign that debuts just before the start of the holiday shopping season will further aid Toysrus.com. The reported $25-million account was recently awarded to D’Arcy/Los Angeles, a subsidiary of Bcom3 Group Inc. That choice of agency could signal a closer working relationship with Toys R Us’ main advertising account, which is handled by Bcom3 Group’s Leo Burnett USA operation.
But even with all the proposed changes, some analysts are wary.
Said Bruce Missett, an analyst at Morgan Stanley Dean Witter: “Questions remain regarding the potential success of Toy’s ongoing initiatives. . . . Our lack of conviction also stems from the competitive change in toy retailing over the past several years.”
Even Prudential’s Ryan, who expects improved performance this holiday, warns that Toys R Us’ sales for this year’s third quarter are likely to look weak against last year’s surprisingly strong period. She also notes that real improvement might take time. Ryan estimates earnings per share for 2000 will be $1.55 before losses from Toysrus.com. In 1994, the company posted an earnings high of $1.85 per share.
Nygren, at Oakmark, says he understands the hesitancy. Although he is 6-feet-2-inches tall, he recalls not being able to reach a product at a Toys R Us store and then not being able to find an employee to help him.
“I think people want Toys R Us to be a fun store,” Nygren said. “If you think about what happens if John Eyler is successful, and these stores can start to draw traffic back, the upside is tremendous.”
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Toying With a Rebound?
The last few years have been enough to make Toys R Us’ mascot, Geoffrey Giraffe, want to play ostrich. But some on Wall Street are cautiously optimistic that a turnaround is a strong possibility for the longer term.
Net sales (in billions)
1999: $11.9 billion
Earnings (in millions)
1999: $279 million
Monthly closes and latest:
Sources: Bloomberg News, Securities and Exchange Commission
Times staff writer Greg Johnson contributed to this report.