Toys 'R' Us weathers week season - Toys "R" Us president and ceo John Eyler - Brief Article

DSN Retailing Today, Jan 21, 2002 by Molly Prior

NEW YORK -- This fall, when the toy industry was gleefully predicting a positive outcome to the coming holiday selling season, most retail analysts would have told you discretionary toy spending was a long shot at best. The economy was dragging, consumer confidence was low and there were no signs of a white knight toy bonanza anywhere on the horizon.

It is for this reason, among many others, that Toys "R" Us president and ceo John Eyler announced he was satisfied--and then some--with the company's modest comp gain of 2% given the "very challenging retail environment."

During a post-holiday conference call, Eyler told analysts, "We were pleased with the acceleration in comparable store sales in our U.S. toy store business from a decrease of 3% in November to an increase of more than 5% during the month of December."

In total sales, the company posted an increase of 4% to $4.3 billion for the nine-week period ended Jan. 5, as compared with the same period last year. This increase is being attributed to toy retailer's aggressive growth initiatives over the last two years. For example, the chain's 433 retrofit "mission possible" stores produced sales gains that were more than 6% better than those at its 270 unrenovated stores.

Last fall, Toys "R" Us launched a media campaign in its top 20 markets, touting its redesigned stores that featured better content, including Imaginarium educational toy boutiques and improved customer service.

Given the retailer's litany of improvements, analysts such as Peter Caruso of Merrill Lynch, expected the toy retailer to post 3% to 4% sales gains in December. Eyler blamed intense margin pressures and the highly promotional environment. "We are in an environment where we've never seen such price slashing," responded Eyler.

Industry watchers named 2001 as the most promotional holiday season in history WalMart's aggressive promotions likely created a domino effect across the industry. That said, Eyler said the retailer did not change its promotional rhythm, although markdowns did reach 80%.

"Wal-Mart's pricing strategy was more aggressive than anyone has ever seen," said Eyler. "Using toys as a loss leader is clearly not our business." Toys "R" US has already admitted it can't compete with Wal-Mart on price.

In a morning research note following the Toys "R" Us call, Caruso wrote, that the toy retailer is moving away from discount store transactions at a time when Wal-Mart is trying to take away market share in this segment at an even faster-than-normal rate.

But Eyler said there is room for three toy retailers, Wal-Mart, Target and Toys "R" Us, to grow market share, particularly in video games.

"We believe in the next three to four years, 12% to 15% of market share will be up for grabs" as mom and pop and regional players continue to fall out, said Eyler.

"Margin pressures were intense in the fourth quarter due to the weighing of video products in our sales mix, as well as the highly promotional retail environment.

These pressures will ease somewhat as the current video cycle matures," said Eyler. Video games accounted for 21% of Toys "R" Us' holiday sales and Eyler expects the category to account for 19% throughout 2002, with software and accessories fueling sales.

Sales on Toysrus.com remained healthy, growing 27% to $159 million from $125 million last year. The New Year will bring more changes at Toys "R" Us. The company will continue to roll out its new Kids "H" Us prototype, renovating 40 more stores and ending 2002 with 49 in total.

Toys "R" Us will also continue to invest in backend improvements. "While we're far from world class in those areas, we are much improved," said Eyler.

Despite the above investments, Eyler expects to see improved profitability and earnings in the first half of 2002, and see a solid return on the initiatives of the last couple years. "Even though we're fiscally conservative, we will aggressively execute our strategies," said Eyler.

Wal-Mart, the No. 1 toy retailers for the third year in a row, achieved 8% comps for December.