Toys R Us Inc., which revolutionized the toy industry more than four decades ago with its big-box, low-price stores, yesterday said it may sell off its toy business as it struggles with fierce competition from a new generation of discounters, led by Wal-Mart Stores Inc.
As part of a broad reorganization outlined yesterday, the Wayne, N.J., company, the nation's second-biggest toy retailer, decided to separate Toys R Us from Babies R Us, its children's clothing and furniture unit. The two groups will begin operating as separate companies in 2005, the company said in a prepared statement.
Toys R Us said it may put its domestic, international and online toy divisions up for sale after this year's holiday shopping season to raise cash. Details are still being worked out, but the strategy will result in a "restructured -- and substantially leaner and more focused -- global toy business that we believe can generate significant cash," the company said.
No immediate store closings were announced.
Toys R Us founder Charles Lazarus opened the first Toys R Us store in Rockville in 1957. The company went public in 1978 and evolved into a powerful international toy vendor, with Kids R Us, Babies R Us and Toyrus.com. It operates 638 stores in the United States and 579 outside the country.
Before small toy retailers feared Wal-Mart, Toys R Us used low prices and wide selection to wipe out hundreds of specialty stores throughout the 1960s and 1970s. Now competition from discounters Wal-Mart and Target Corp. has left Toys R Us struggling for profit and searching for ways to cut costs. The chain's profit fell 62 percent in its fiscal 2003, to $88 million, and sales have remained flat at $11.6 billion.
"Discounters have gobbled up the toy business and made it a price game, and frankly, Toys R Us cannot compete," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York consulting firm.
Other large toy chains have suffered even more. FAO Schwartz Inc. and KB Toys Inc. have filed for Chapter 11 bankruptcy protection, both citing competition from discounters.
Toys R Us's financial troubles are not new. In 2003, the company said it would sell 146 of its of its Kids R Us children's clothing stores and 36 Imaginarium stores, which sell educational products.
But analysts said the restructuring announced yesterday is the most significant.
Toys R Us said that over the next year it would reduce operating expenses at its headquarters and U.S. toy business by more than $125 million and cut capital spending on its domestic and international toy business by about $150 million.
In addition, it plans to mark down prices by a total of $150 million throughout its U.S. stores to quickly sell inventory and raise cash.
Richard L. Markee, vice chairman of Toys R Us, was named president of Babies R Us and will become its chief executive after it is separated from the company. Jon Kimmins, now treasurer of Toys R Us, will become chief financial officer of Babies R Us.
"This illustrates they are willing to take some very aggressive moves," said Sean P. McGowan, an analyst at Harris Nesbitt Corp., a New York brokerage house. "They realize the competition is not going away."
Toys R Us may be synonymous with toys, but its fastest-growing business is Babies R Us, which sells children's clothes, furniture and accessories. The company opened 16 new U.S. stores in 2003, giving it about 200. In its 2003 report, it said it planned to build 20 new Babies R Us stores this year.
McGowen said that business is less vulnerable to competition from discounters than the toy industry. "It is not dependent on having a hot toy during any given season," he said.
Many shoppers seem to prefer the convenience of general merchandise chains, which sell products including detergents and baby toys at discount prices, said Jim Silver, publisher of ToyBook, a New York-based trade publication. "The world changed and shifted to one-stop shopping. Toys R Us has not adapted to bring people into its stores."