Toys 'R' Us plots expansion at home and abroad - Discount Stores Annual report - company profile

Discount Store News, July 4, 1988

Toys `R' Us Plots Expansion at Home and Abroad

ROCHELLE PARK, N.J. -- Before the 1988 annual meeting of Toys "R" Us started in New York last month, a small, redheaded boy walked up to chairman Charles Lazarus and told him: "My grandma and grandfather bought me stock in your company.

"Is it going to make any money this year?" the lad asked.

Lazarus' answer was inaudible. But all available signs point to another profitable year ahead as the leading toy retailer continues to grind out market share gains.

In 1987, TRU logged a 21.7 percent increase in pre-tax profits on a 28.3 percent gain in sales. Before income tax, profits grew to $345.9 million from $284.2 million in 1986. After-tax profits rose 34 percent to $203.9 million, equal to $1.56 a share, from $152.2 million and $1.17 a share in 1986. Since its inception in 1978, TRU has enjoyed a compounded profits growth of almost 31 percent a year.

Same Store Sales Jump 10.1%

Sales rose in 1987 to $3.14 billion from $2.44 billion in 1986. More important, same store sales jumped 10.1 percent, a gain from 8.5 percent the previous year.

Profits in the year ended Jan. 31, 1988 equaled 6.5 percent of sales, compared to 3.93 percent at vaunted WalMart.

Another favorable sign for TRU profits: its effective tax rate drops to 37.5 percent for the current rate from 41 percent in 1987.

Profits in 1988 will rise 35 percent to $2.15 a share and in 1989 rise again to $2.60 a share, predicted Daniel E. Barry, retail analyst for Kidder Peabody, in a May 27 report.

"Toys "R" Us is one of only a handful of retailers whose strong earnings will be virtually assured in the difficult retail environment we anticipate over the next two years," Barry wrote. "Sales and earnings should be boosted more than investors expect by a developing boom in video games.

"The added impetus from video games should enable Toys "R" Us to report the biggest sales and earnings gain of any billion-dollar retailer this year," Barry predicted.

"With the recent change in management of Child World [the nation's No. 2 toy retailer], its highly aggressive pricing policy of the past two years is expected to be relaxed," Barry said, "allowing Toys to generate stronger same store sales gains in markets where they both compete."

Adding Two Points of Market Share

TRU is adding at least two points of market share a year to its commanding 20 percent, said Robert J. Schweich, managing director for Wertheim Schroder, a New York investment house that underwrote a $100 million debenture issue for Toys "R" Us in January 1987.

Within 10 to 12 years. TRU will control as much as half the retail toy market, Schweich predicted.

At its annual meeting June 7, stockholders approved an increase in the number of shares outstanding to 350 million from 200 million. The increase suggests the possibility of a three-for-two stock split, Schweich said.

Video games "continue to be a real bonanza," Schweich noted in a May 8 report. "The company is using its financial strength to secure electronic merchandise, which generally is in short supply," he wrote.

TRU will continue to be competitive on prices, Schweich said, but less so because of diminished pressure from Child World.

"Toys was successful at aggressive pricing, where Child World fell down," the analyst said.

Chainwide scanning, which TRU installed last year at a cost of $35 million, was an important factor in TRU's 18 percent gain during the prime Christmas season. Thanks to scanning, "Toys gets customers in and out faster than Child World," Schweich said.

TRU now is adding scanning to its Kids "R" Us children's apparel chain.

Kids apparel accounted for about $250 million in 1987 sales, Schweich estimated, forecasting a gain to $400 million for 1988. Kidder Peabody's Barry estimated that the Kids division contributed 1 cent a share to 1987 earnings and will account for 4 cents a share in 1988.

Lazarus said he was pleased with the large number of toys introduced at the February Toy Show in New York.

"We benefit from toy diversity because we are able to show it all," he remarked.

With an average store size of 46,000 square feet, TRU stocks 18,000 sku's in its system.

For 1988, TRU has set another major expansion course, entering two new markets, Kansas City, Mo., and Western Canada, Lazarus said. In 1989, TRU will enter France, another foreign market in addition to Great Britain, West Germany, Canada, Hong Kong and Singapore.

It plans to add 15 foreign stores to the 37 it started the year with. Domestically, it will add 45 stores to the 313 at the start of its fiscal year.

35 Kids Stores to Open in '88

In addition to 60 Toys stores, TRU plans to open 35 more Kids apparel stores, including 10 units in a new market. Southern California, on top of the current 72.

During 1987, TRU added 42 more U.S. Toys stores and 13 international, entering three new markets: Pittsburgh, Phoenix and West Germany, and 31 Kids apparel stores.

In his letter to stockholders in the 1987 annual report, Lazarus said the company plans this year to improve productivity by starting labor scheduling in its distribution centers, increasing the use of computers and materials handling equipment in distribution centers, start electronic data interchange (EDI) with suppliers and electronically transmit credit card data.