Challenge to new prez: cut costs, improve profits - Peter J. Hayes, new president of Child World toy stores - Annual Industry Report, part 2

Discount Store News, July 18, 1988

Challenge to New Prez: Cut Costs, Improve Profits

AVON, Mass.--Child World has a brand new president who inherits a new set of marching orders for 1988: cut costs and improve profitability, rather than strive for market share.

After two years on the job, Gilbert L. Wachsman resigned as president in February, apparently a victim of his aggressive pricing policy that contributed to disappointing earnings results. Then, for four months, Dennis H. Barron, chairman of Child World's parent, Cole National, reassumed the title of president.

Effective June 15, Peter J. Hayes took over as president and as a board member. For the previous three years, Hayes had been the chairman of Gold Circle. Hayes left amid the turmoil engulfing Gold Circle, a Federated division that Robert Campeau has proposed selling to help pay down his $4.6 billion debt assumed in order to acquire Federated.

In announcing Hayes' appointment May 18, Barron said Hayes will "bring to the Child World team a breadth and depth of merchandising and management skills including extensive knowledge of the toy business."

Prior to joining Gold Circle, Hayes had served 16 years at Hills Department Stores, where he rose to vice president of merchandising, advertising and sales promotion.

At presstime, Hayes was unavailable for comment on his plans to boost profits.

But in February, Child World disclosed that it intends to tone down the aggressive pricing policies set during Wachsman's tenure. Toys "R" Us, the No. 1 toy specialty chain in sales and profits, had responded to Child World's price slashing by cutting its own prices in markets where they were in competition.

In 1987, sales at Child World jumped 19 percent but operating profits before income taxes declined by 13.5 percent. In comparison, profits at Toys "R" Us spurted 34 percent on a 28 percent sales increase. Child World revenues rose to $749.1 million in the fiscal year ended Jan. 30, 1988, from $628.8 million the previous year. Operating profits before taxes were $22.5 million, down from $26 million the year before.

A change in accounting rules regarding inventories enabled Child World to report net income of $14.3 million, an increase from $10.9 million. However, applying that accounting rule retroactively would result in flat earnings between 1986 and 1987, Child World said in its annual report.

Pre-tax income actually fell to $22.5 million in 1987 from $26 million, and only a reduction of $4.1 million provision for income taxes produced an increase in operating profits. Child World's effective tax rate for 1987 fell to 48.9 percent from 57.9 percent in 1986. The 1988 tax rate isn't readily available.

In his letter to stockholders in the 1987 annual report, Barron stated that he had reassumed the presidency "in order to modify certain operating strategies designed to improve profitability" but his statement lacked any specifics about those changes in operating strategy.

In addition to aggressive pricing, "increased costs of advertising, other programs and higher than expected inventory shrinkage in our self-service electronics centers" also held back earnings, Barron wrote.

Profits amounted to 1.53 percent of 1987 sales, concluded Kurt Salmon Associates in its 14th annual profile of retailing. That compares with 6.5 percent at Toys "R" Us.

During the first quarter ended April 30, 1988, the profit picture worsened for Child World. Sales rose 14.8 percent to $119.6 million from $104.2 million in the same quarter of 1987. The chain's customary first period loss increased, however, to $4.4 million, or 38 cents a share, from $2.8 million and 24 cents a share a year ago.

In releasing the results, Barron blamed the larger first quarter loss on the higher expenses of the 18 new stores opened last year and the new distribution center opened this February. "We are optimistic that [unspecified] operating strategies implemented in early 1988 will yield significant improvements in overall results this year," Barron said.

Hayes likely will work more on profits than market share--now increased to more than 5 percent--said Daniel D. Barry, retail analyst for Kidder, Peabody & Co.

Price cuts helped boost sales by 40 percent over two years, but that increased market share resulted in only modest profit gains. Child World was even cutting prices on toys that were in short supply, he said.

In addition, "Child World needs to work on store operations," Barry said. "A lot of older stores are sloppy."

Child World "has to generate profit," said Robert J. Schweich, managing director and toy industry analyst for Wertheim Schroder.

Hayes will continue the policy that Barron set of being less aggressive on pricing, Schweich predicted.

In a merchandising move, Child World followed the lead of Toys "R" Us in taking on disposable diapers chainwide last year. Diapers, however, often are priced as a traffic-building loss leader, or at best produce little profit.

Child World also established a full candy department last year, along with expanding its party goods department. Unlike diapers, candy does produce good margins.