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Toys R Us turnaround turns heads

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In the race to sell Transformers, Rock ’N Roll Elmo and Lalaloopsy, Toys R Us knows how to win. That’s no small feat for a company once marked for death as specialty toy retailers crumbled under pricing pressure from Wal-Mart and Target.

But aggressive moves in recent years have placed Toys R Us on a path of resurgence. Buying up failingrivals, cutting costs, building an online presence and ramping up exclusive offers have positioned the retailer to regain lost market share.

The chain’s revival comes despite flagging consumer spending that has raised doubts about the nation’s recovery from the recession. This holiday shopping season will be a critical test for the retailer — and for the broader economy — revealing whether Americans feel confident enough about their financial futures to open their wallets.

Toys R Us is heading into the holidays with some momentum. Revenue has climbed about 19 percent, reaching nearly $14 billion last year, since a group of private financiers bought the company in 2005. It has also wrested 1.4 percent of the market away from competitors since the 2008 holiday season, when the economy was slumping, according to the research firm NPD Group.

Industry officials and analysts attribute the turnaround to Toys R Us chief executive Jerry Storch, who took the helm in 2006. Under his watch, the company posted sales gains every December, even as the recession corroded toy industry profits.

“Everybody in the toy industry thought Toys R Us was going to go out of business before Jerry became CEO,” said Isaac Larian, chief executive of MGA, which makes Bratz and Lalaloopsy dolls. “The company was in such bad shape, I frankly didn’t think he could turn it around. He proved me wrong.”

His success may have forced the competition’s hand.

Wal-Mart, after dreary sales last year, has thrown down the gauntlet by promising to retroactively match competitors’ lower prices throughout the holidays. If the behemoth's strategy doesn’t strike fear among rivals, perhaps Amazon.com with its wider selection of toys will.

If that pressure isn’t enough, analysts say the long-delayed initial public offering of Toys R Us will hinge on its performance this holiday season.

Still, there’s something to be said about the path that Toys R Us has made for itself. When a trio of private equity firms — Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty Trust — snagged the company for $6.6 billion, market watchers predicted that the new owners would sell off the business one store at a time.

Storch, a former Target executive credited with turning around its bygone subsidiary Marshall Field’s, came in to “restore [Toys R Us’s] rightful place as the authority in the kids’ space,” he said in an interview.

He swept up the remains of the company’s former rivals. In 2009 alone, Toys R Us tucked the struggling FAO Schwarz and the rights to the KB Toys brand into its portfolio for an undisclosed sum. It also absorbed several failing online competitors, including BabyUniverse.com and eToys.com.

Price competition crippled many of those retailers, but analysts said Toys R Us dodged that outcome by providing a wider selection of exclusive toys from manufacturers such as Hasbro and Mattel. The company also sells toys under its own labels, such as Imaginarium and You & Me.

The exclusive-deal strategy has allowed Toys R Us to compete with prices that are on average 5 to 8 percent above those of Wal-Mart and 4 to 6 percent of Target, according to the research firm IBISWorld.

“Customers want value for their money, and that means more than just a great price. . . . It’s getting something unique and special,” Storch said. “We can carry so many more toys than the limited-assortment mass merchants, who tend to be the competition, that thousands of our toys are unique to our store.”

This season, Toys R Us has an arsenal of promotions to part consumers from their cash — including expanding its layaway program and giving loyalty rewards members 10 percent back on holiday purchases. Holiday sales account for as much as 40 percent of the company’s annual sales.

The company also plans to open hundreds of temporary stores and extend hours of operation around the clock. Although Toys R Us has expanded its product lineup, it has also streamlined operations.

“The stores are cleaner. They’re more organized. The shelves are far less cluttered then they used to be,” said Kantar Retail analyst Lynne Vantassel.

Although many analysts are tempering their forecasts of consumer spending this summer, given soaring unemployment and the economy’s ongoing struggles, Toys R Us could again defy expectations.

“Jerry takes a lot of pride in building partnerships and has assembled a tremendous team to ensure that his vision for the chain is executed,” said Hasbro chief executive Brian Goldner.

© The Washington Post Company