Expansion abroad outpaces domestic growth - The Power Retailers: Toys "R" Us

Discount Store News, Feb 5, 1996

Faced with stiff competition from Wal-Mart, Target and Kmart, Toys "R" Us is banking heavily on international expansion for continued growth as the 20th century winds to a close.

Another factor turning TRU's attention abroad: Its U.S. expansion will soon reach the saturation point, according to a report last December by Merrill Lynch vice president Peter Caruso.

For the third year in a row, TRU opened more new stores abroad than at home. For the year ended Jan. 31, 1996, TRU opened a net of 44 new stores abroad, for a yearend total of 337, after closing a store in the United Kingdom. That compares with 35 new domestic stores for a total of 653.

In the previous year, TRU opened 59 stores abroad, against 40 at home.

It now operates in 21 countries, and by the year 2000, TRU could be operating almost as many stores abroad as it does in the United States.

It is equally interesting to note where TRU is not opening stores. None of the 337 foreign stores on the '96 plan are in Mexico or other Latin American countries. TRU should be looking more closely at Latin America before entering countries 8,000 miles away, said Jack Seibald, retail analyst for Blackford Securities, New York.

Canada - where TRU launched an international push 12 years ago - represents its largest foreign presence with 58 units. It now faces rapidly growing competition from Wal-Mart Canada.

Store tallies elsewhere include 57 units in Germany, 37 each in France and Japan, 26 in Spain and 21 in Australia.

In 14 other countries, TRU's reach ranges from one store (Israel and the United Arab Emirates) to nine stores (the Netherlands). The units in Israel and the UAE are both franchised, TRU's new growth vehicle for countries with strict equity laws and small populations. The arrangement lets someone else risk capital and avoids entanglements such as TRU encountered in Sweden. Following a three-month strike last year at its three Swedish stores, TRU signed franchise deals in Sweden and Denmark. The franchisee, 95-unit Top Toy, Scandinavia's top toy retailer, will take over operation of the three TRU stores in Sweden and one in Denmark, effective April 27. It will convert eight of its Danish stores to the TRU concept.

To support its thrust abroad, TRU has opened 11 distribution centers overseas (it has 17 in the United States), including a state-of-the-art DC last year in Germany.

International operations are providing about one-quarter of the total sales and a growing share of operating profits, even though profit margins on foreign stores run about 7%, compared to 12% for domestic stores.

In 1994, foreign sales totaled $2.1 billion, or 24% of total volume of $8.75 million. Operating profits for the year were $140.8 million, or 15.3% of the company total. That compares with $102.9 million, or 12.4% of the total operating income, in 1993 on sales that accounted for 26.5% of company revenues.

TRU has set a goal of $175 million to $190 million in operating profits for the fiscal year just ended. Merrill Lynch analyst Caruso predicts it will come in at the lower end of the range. He based his expectations on strong sales in Japan, Spain and France; the positive impact of strong currencies in Japan and Europe; and improved productivity and expense controls in all regions.

With most of the start-up expenses already incurred and an infrastructure in place, the potential for continued international expansion remains "substantial," Salomon Brothers analyst Jeffrey Feiner wrote in a January report. Feiner minimized the departure last October of TRU International president Larry Bouts, who was succeeded by the division's then-senior vp, gmm Gregory Staley. "The company's international management team is broad and deep," Feiner noted, and Staley is highly experienced in international toy retailing.

For the recent Holiday, some international markets outperformed U.S. stores, which logged a 1% comp store gain for November and December 1995.

In contrast, stores in the United Kingdom, spurred by the introduction of computer hardware, recorded a doubledigit comp store gain. Japan reported a comp store gain in the mid single digits, despite the cycling against the introduction of Sega and Sony 32-bit video hardware systems the previous year.

Offsetting those increases, stores in Canada, France, Spain and Australia reported declines, while same store sales in Germany were flat.

But flat sales in Germany, where the economy ground to a halt in the fourth quarter, amounts to a "huge moral victory," said Peter Monash, an international retailing consultant based in Columbus, Ohio. Many German retailers reported same store declines.

With the Japanese economy turning around, Japan will turn out to be the biggest plum for TRU, Monash said.

TRU is following the same success pattern it used to turn itself into a Power Retailer in the United States, Monash said, increasing the size of the pie by making toys more of a year-round business.

Internationally, it keeps the merchandising focus on toys, avoiding the highly localized market for kids apparel. Toys are generally universal in their appeal, and about 70% of the merchandise in foreign stores is stocked in U.S. stores, Monash said. TRU has to localize offerings only for the 30% balance.