- The Washington Times - Wednesday, August 11, 2004

NEWARK, N.J. (AP) — Toys R Us Inc., battered by price wars from discounters, particularly Wal-Mart, is considering getting out of the toy business.

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

The $11.6 billion company also is pursuing a 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 the toy and baby business 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 its ratings on Toys R Us remained on CreditWatch 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 as it also dramatically expanded the number of stores.

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

Babies R Us, which represents 15 percent of the company’s total revenues, posted sales of $1.76 billion, up nearly 11 percent, for the year ended Jan. 31. Meanwhile, Toys R Us U.S. revenues fell 4 percent to $6.48 billion. Toys R Us has 683 toy stores in the United States and 579 international toy stores. It also sells through its Internet site.

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.

Still, shares fell 27 cents to close at $16.15 on the New York Stock Exchange.

John Eyler, chairman and chief executive officer, 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 officials declined to elaborate on their plans.

Richard Hastings, an analyst with Bernard Sands, was critical of the plan and said the Toys R Us announcement “is not as transparent as we would prefer.”

The big question is who would buy the toy business, given that the industry has been reduced to cutthroat price wars?

Mr. Hastings said a buyer, should one emerge, would be more likely to be a private equity investment than a public company, as happened with rival FAO Schwarz. He could not estimate a price.

“They seem to be throwing this up in the air to see where it lands,” Mr. Hastings said. “This sounds like the aftermath of some very, very weak results.”

Toys R Us said yesterday it would delay releasing its second-quarter earnings until Aug. 23. The figures were to be released Monday. In the first quarter, the company’s profit declined 48 percent in its fourth fiscal quarter, which ended Jan. 31 and covered a disappointing holiday sales season. Disappointing results continued into the first quarter, with the retailer posting a wider-than-expected loss and lower sales.

Poor holiday results last year helped lead to the bankruptcies of FAO Schwarz and K-B Toys.

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