Retail analysts predict the new owners will separate the more lucrative Babies R Us from its parent company and eventually spin it off as a separate public company. The baby division posted operating profit of $198 million in 2003, twice that of the company's U.S. toy division.
"I'd be very surprised if you don't see Babies R Us as a public franchise in the near future," said Gregg Tenser of NWQ Investment Management, which as of December owned 4.6 million Toys R Us shares.
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Analysts blame the bulk of the toy chain's troubles on a single competitor: Wal-Mart.
The Bentonville, Ark., retailer dethroned Toys R Us as the nation's No. 1 toy seller in 1998. Today, Wal-Mart controls 22 percent of the U.S. toy market, compared with 17 percent for Toys R Us, according to Davidowitz & Associates Inc., a New York-based retail consulting firm.
In 2000, Toys R Us lured Eyler away from competitor FAO Schwarz Inc. and tried to redefine itself. It built a new flagship store in New York's Times Square, complete with an indoor Ferris wheel, and remodeled hundreds of stores, at a cost of about $600,000 each.
But it could not stop Wal-Mart from beating it on toy prices. During the 2003 holiday shopping season, Wal-Mart undercut Toys R Us prices by an average of 20 percent, said ToyBook publisher Silver.
Toys R Us scrambled to match those prices, a move that propped up sales but dampened profits. The chain's profit fell 62 percent in its fiscal year 2003, to $88 million, and sales have remained flat at $11.6 billion.
Other large toy chains have suffered even more. FAO Schwartz and KB Toys Inc. have filed for Chapter 11 bankruptcy protection, both citing competition from discounters. FAO recently emerged from bankruptcy, but now operates just two stores.
Toys R Us has avoided that fate. Since 2003, the company has sold its 146-store Kids R Us clothing chain and closed 36 Imaginarium stores, which sold educational products. In early 2004, the company promised to cut spending by $175 million.
White reported from New York.
