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Toys R Us to Cut Jobs, Close 64 U.S. Stores

Retail: The move is part of an attempt to reclaim customers amid increasing competition.

January 29, 2002|ABIGAIL GOLDMAN | TIMES STAFF WRITER

Toys R Us Inc. said Monday that it is cutting 1,900 jobs and closing 64 domestic stores in a move to speed up modernization of its aging stores and recoup customers lost to smaller rivals and giant merchants such as Wal-Mart Stores Inc.

The move is part of a broader effort by the nation's second-largest toy seller to reverse a market-share decline by making its stores more compelling and its merchandise mix unique.

Although investors reacted positively to the plan, driving the stock up 6%, analysts say more needs to be done and the slow pace of change has resulted in further customer defections.

"The good news is that these guys have taken a look at their portfolio and are cleaning house," said Melissa Williams, a toy industry analyst with Gerard Klauer Mattison in New York. "This is not the last thing they'll do in terms of merchandising and customer service, which will continue to evolve. In terms of infrastructure and real estate, this is probably the last part of the U.S. toy store overhaul."

As part of the plan, the company will shutter 27 older-style Toys R Us stores and 37 of its troubled Kids R Us stores. Kids R Us, offering children's clothing in a large-store format, has suffered against more value-conscious discounters such as Wal-Mart, and many investors and analysts two years ago said the chain should be liquidated.

Toys R Us operates 1,609 stores worldwide, including 703 domestically. It was not clear whether any of the company's roughly 130 California stores would be closed. The Paramus, N.J.-based company also will consolidate much of its administrative and financial functions, moving operations that had been in five facilities under one roof.

In a Monday morning conference call with analysts, Chairman and Chief Executive John Eyler said 10 of the Toys R Us stores could be relocated. He added that some shuttered Kids R Us stores would find new homes in revamped combination stores that add Kids R Us apparel to Toys R Us stores.

Eyler said a test group of nine revamped Kids R Us stores delivered double-digit sales growth compared with the year before. Combination Toys R Us and Kids R Us stores, he said, were performing well and eliciting positive customer response.

The announcement by the 2-year-old management team, led by former FAO Schwarz chief Eyler, follows a series of steps aimed at refurbishing the stores--and the image--of a onetime retail giant, which three years ago lost its top toy-seller title to Wal-Mart.

Shortly after his arrival, Eyler revamped the modernization effort begun by predecessor Robert C. Nakasone, rolling out what he called the "Mission Possible" store format. The new stores include a boutique section of higher-priced educational toys, an enlarged stuffed-toy section called Animal Alley and a more navigable floor plan, marked by a racetrack-type floor design and an end to legendary sky-high warehouse shelving.

The cornerstone of the remodel effort came last fall, when the company opened its Times Square flagship store. Unfortunately, that opening came just before the Sept. 11 attacks, which severely reduced tourist visits.

Monday's announced closures, analysts said, is an acknowledgement that not all of the company's existing stores are worthy of the significant funds necessary to bring them up to the level of the newer and refurbished stores.

"The company is pruning under-performing stores that do not meet return-on-capital requirements, which should help boost overall store productivity levels," said William Julian, an analyst with Salomon Smith Barney, in a note to clients. "However, this move shows that the business is still struggling and the improved performance of renovated stores isn't strong enough to carry the company through the recession."

Toys R Us said this month that a 4% overall gain in holiday sales would enable it to meet Wall Street's earnings estimates for the year of 93 cents a share, according to analysts surveyed by Thomson Financial/First Call. Those estimates had been revised downward after the company's warning in October that profit probably would come in at the lower end of expectations.

"This is a logical step in the turnaround," said William Nygren, portfolio manager for two Oakmark funds that together held about 11 million Toys R Us shares, according to the funds' most recent reports. Eyler "inherited a franchise that needed a lot of work, and he had indicated back then it would be a five-year project to put the company in the position it needed to be in."

As a result of the changes, the company expects to realize a $25-million gain in pretax earnings in 2002 and $45 million in 2003, of which payroll savings alone will account for $30 million.

The latest move is expected to result in a charge for the quarter ending Friday of $126 million after taxes. Shares in Toys R Us rose $1.15 to close at $19.90 on the New York Stock Exchange.

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