NEWARK, N.J. Toys "R" Us Inc., battered by price wars fromdiscounters, particularly Wal-Mart, is considering getting out ofthe toy business.
The nation's second-largest toy retailer behind Wal-Mart StoresInc. announced plans Wednesday to restructure its toy business, butsaid it is considering selling the business outright as part of aneffort to dramatically reduce operating and capital expenses.
The $11.6 billion company is also pursuing a possible spinoff ofits fast-growing Babies "R" Us, whose 200 stores sell furniture,including cribs and bedding, as well as accessories. The companywill begin operating the toy and baby business as separate entitiesin the meantime.
The Babies "R" Us division has been the company's growth vehicle,and has not been as vulnerable to discounters, Standard & Poor'scredit analyst Diane Shand said in an S&P statement affirming itsratings on Toys "R" Us remained on CreditWatch with negativeimplications.
The company's U.S. toy division, however, has been inconsistentsince the mid-1990s, when Wal-Mart ramped up its toy department asit also dramatically expanded the number of stores.
"Traditional toys have decreased in importance, as children areturning to video games, computer software, sporting goods, and musicfor entertainment at younger ages," Shand said.
Investors cheer news
Babies "R" Us, which represents 15 percent of the company's totalrevenues, posted sales of $1.76 billion, up nearly 11 percent, forthe year ended Jan. 31. Meanwhile, Toys "R" Us U.S. revenues fell 4percent to $6.48 billion. Toys "R" Us has 683 toy stores in theUnited States and 579 international toy stores. It also sellsthrough its Internet sites.
The announcement "is extremely positive for investors, as one ofthe critical pieces to unlocking shareholder value in (Toys "R" Us)is separating its crown jewel, Babies "R" Us," said Mark Rowen, ananalyst at Prudential Equity Group Inc.
Still, shares fell 27 cents to close at $16.15 on the New YorkStock Exchange.
John Eyler, chairman and chief executive officer, said the globaltoy and Babies "R" Us businesses are at "fundamentally differentphases in their growth cycle," and separation would give the babybusiness more opportunity to continue its healthy growth.
Company officials declined to elaborate on their plans.
Richard Hastings, an analyst with Bernard Sands, was critical ofthe plan and said the Toys "R" Us announcement "is not astransparent as we would prefer."
The big question is who would buy the toy business, given thatthe industry has been reduced to cutthroat price wars?
Hastings said a buyer, should one emerge, would be more likely tobe a private equity investment than a public company, as happenedwith rival FAO Schwarz. He could not estimate a price.
"They seem to be throwing this up in the air to see where itlands," Hastings said. "This sounds like the aftermath of some very,very weak results."
Toys "R" Us said Wednesday it would delay releasing its secondquarter 2004 earnings until Aug. 23. The figures were to be releasedMonday. In the first quarter, the company's profit declined 48percent in its fourth fiscal quarter, which ended Jan. 31 andcovered a disappointing holiday sales season. Disappointing resultscontinued into the first quarter, with the retailer posting a wider-than-expected loss and lower sales.
