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Toys R Us May Sell Core Division

Hurt by price wars from discounters, the retailer considers exiting the business to slash costs.

August 12, 2004|From Associated Press

Toys R Us Inc., battered by price wars from discounters, particularly Wal-Mart, said Wednesday that it was considering getting out of the toy business.

The nation's second-largest toy retailer, behind Wal-Mart Stores Inc., announced plans to restructure its toy business but also said it was considering selling the business outright as part of an effort to dramatically reduce operating and capital expenses.

In addition, the $11.6-billion company is pursuing a possible spinoff of its fast-growing Babies R Us, whose 200 stores sell furniture, including cribs and bedding, as well as accessories. The company will begin operating its toy and baby units as separate entities in the meantime.

The Babies R Us division has been the company's growth vehicle and has not been as vulnerable to discounters, Standard & Poor's credit analyst Diane Shand said in an S&P statement affirming that Toys R Us remained on its CreditWatch list with negative implications.

The company's U.S. toy division, however, has been inconsistent since the mid-1990s, when Wal-Mart ramped up its toy department.

"Traditional toys have decreased in importance as children are turning to video games, computer software, sporting goods and music for entertainment at younger ages," Shand said.

Toys R Us has been retrenching for much of the last year. In November, it said it would close 146 Kids R Us clothing stores and 36 Imaginarium specialty toy stores, which sold educational toys. The company had 65,000 employees at the end of January.

Babies R Us, which represents 15% of the company's total revenue, posted sales of $1.76 billion, up nearly 11%, for the year ended Jan. 31. Meanwhile, Toys R Us' U.S. revenue fell 4% to $6.48 billion. Toys R Us has 683 toy stores in the U.S. and 579 toy stores abroad. It also sells through its Internet sites.

The announcement "is extremely positive for investors, as one of the critical pieces to unlocking shareholder value in [Toys R Us] is separating its crown jewel, Babies R Us," said Mark Rowen, an analyst at Prudential Equity Group Inc.

Toys R Us Chairman and Chief Executive John Eyler said the global toy and Babies R Us businesses are at "fundamentally different phases in their growth cycle," and separation would give the baby business more opportunity to continue its healthy growth.

Company executives declined to elaborate on their plans.

Shares of Toys R Us fell 27 cents to $16.15 on the New York Stock Exchange.

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