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Season of Change at Toys R Us

The once-prospering toy retailer saw its stock plunge after a poor showing in sales and earnings for the holiday quarter. But new CEO John Eyler's plan to redesign stores, streamline product selection and improve Web site have Wall Street taking notice.

July 16, 2000|ABIGAIL GOLDMAN | TIMES STAFF WRITER

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.

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