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Toys R Us to Open Temporary Stores as Retail Battle Escalates

By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, September 15, 2009

The battle for holiday sales is about to erupt in the toy aisle.

Toys R Us is expected to announce today that it will open 80 temporary stores next month in shopping centers across the country, an aggressive maneuver by a company that just a few years ago was nursing its wounds after a brutal price war with Wal-Mart. This season, the retailer seems determined to take the offensive. It will also open toy shops in more than 260 of its Babies R Us locations and has bought the rights to its rivals KB Toys and FAO Schwarz.

"We're energized by the opportunities this holiday season for those who are aggressive," Toys R Us chief executive Jerry Storch said.

But it's not the only retailer ramping up toy operations before Christmas. Sears has already installed permanent toy shops in 20 stores in New York, San Francisco, Los Angeles and Chicago. Behemoth discount retailer Wal-Mart said it is planning exclusives with popular licensed brands such as Bakugan and Transformers.

"I think every lever that can be pulled will be pulled," said Anita Frazier, senior industry analyst for the market research firm NPD Group.

The holiday season is the most important time of the year for retailers, accounting for as much as 40 percent of annual sales. Last year, the industry was caught off guard by the financial crisis and the subsequent fall-off in consumer demand, resulting in mass layoffs, hundreds of store closures and big-name bankruptcies. Their performance this year will be closely watched as a key measure of consumer health -- and as a potential indicator of economic recovery.

The toy industry has weathered the storm better than other sectors, though it has suffered from shoppers' newfound frugality. In 2008, the average number of toys bought per household dropped 5 percent, according to NPD Group. Industry sales through June fell 2 percent from June 2008, to $7.8 billion, though shoppers spent an average of 1 percent more per toy.

Toys R Us reported earlier this month that profit during the second quarter doubled, to $27 million, despite a decrease in revenue. Though the company was able to cut costs and improve margins, shoppers remained reluctant to buy pricey video games and consoles.

"There is still enough consumer uncertainty and skittishness that I think folks will continue to be very careful with their spending and actively pursue bargains and deals," Frazier said.

Toy retailers struggled to survive as discounters Wal-Mart and Target launched an aggressive strategy to win over shoppers several years ago. The ensuing price war forced FAO Schwarz and KB Toys into bankruptcy protection and hobbled Toys R Us.

But Toys R Us was revived by an investment group that includes Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust and has spent the past year scooping up the remains of its former rivals. It acquired FAO Schwarz for an undisclosed sum in May and bought the rights to KB Toys' brand earlier this month. It also bought several online competitors, including eToys.com and BabyUniverse.com.

"They just seem to be steamrolling," said Sean McGowan, an analyst with Needham & Co. "I see Toys R Us looking around and saying, 'Hey, we're stronger than a lot of people.' "

The 80 temporary locations represent about a 9 percent increase in the company's fleet of flagship stores. Toy R Us said they will be about 4,000 square feet and stay open through January. In the Washington area, temporary stores are planned for Columbia in Maryland and Springfield, Fairfax, McLean and Manassas in Virginia. The shops inside Babies R Us locations will be about 2,500 square feet.

The chain has also begun to tiptoe into Wal-Mart's territory. It began putting displays with at least 100 products that cost $3 or less at the front of its stores in the spring. And it started selling basic goods -- such as cleaning supplies, toilet paper and lunchbox snacks -- at what it calls R Markets in more than 200 stores.

"It's always intensely competitive among the big toy sellers," said Carter Keithley, president of the Toy Industry Association, a trade group. "We do think they'll be aggressive in pricing."

For its part, Wal-Mart says it is ready. The retailer recently launched a "family night center" in its stores, showcasing $10 DVDs and $8 board games to entice its primarily female shoppers.

"Though September is still a little early to shout Christmas in stores, we will definitely be ready when she's ready, with incredible values across toys from core basics to hot new items," said Laura Phillips, Wal-Mart's chief toy officer.

Meanwhile, Sears said it has seen encouraging results from the toy departments it added to 20 stores in August. Company spokesman Tom Aiello said the shops sell a mix of the most popular toys and specialty brands such as Madame Alexander dolls. In addition, the department store chain typically stocks a few toys on the shelves of all of its stores during the holiday season.

"It's part of a bigger effort," he said. "Really, this is our first step."

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