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Toys R U.S. Profit Down, But Outlook Good

NEW YORK — Toys R Us Inc. (TOY.N), the No. 1 U.S. toy retailing chain, on Monday said profits for the second quarter fell sharply from a year ago, however analysts said they are optimistic that the company is on the right track to improving their overall product offerings and cultivating their Internet retail site into a profitable operation.

Profits for the second quarter fell about 75 percent from a year earlier, dragged down by the company's struggling online business. However, industry watchers said they expect to see better results from the company's recent deal with retailing giant Inc. (AMZN.O) to develop new online stores.

"We all knew that this was going to be a tough quarter from a (comparable) store sales point of view, and in fact comps were negative in the U.S.,'' said Ursula Moran, an analyst with Sanford C. Bernstein. "But that wasn't a surprise.''

Moran said two positives worth noting were an increase in gross margins versus the same period one year ago, as well as the previously announced stock repurchase plan through which Toys R Us planned to buy back up to $1 billion of its shares.

Shares of Toys R Us closed up 5/8 at 18 on the New York Stock Exchange, near their 52-week high of 19. Their low for the period was 9-3/4.

Wall Street analysts were expecting Toys R Us to break even for the quarter, according to First Call/Thomson Financial, which tracks earnings forecasts.

Analysts said the spin-off of the company's Japan operations also dampened profits for the quarter because the company was no longer able to benefit from those revenues. They added that the company's continuing struggles with its Internet business also brought down results.

"We are very pleased by our results in the second quarter,'' Eyler said in a statement. "Despite the lack of hot toys that drove sales in the year-ago period, we reported strong revenues, thereby indicating the strength of our underlying core business.''

U.S. "same-store'' sales -- sales at stores open at least a year -- fell 2 percent in the second quarter. International same-store sales rose 3 percent, as stores in France continued to report double-digit gains and stores in Britain reported low-single-digit gains.

Eyler said despite seeing significant short-term charges and expenses related to moving the operations into the new joint Internet site, he does see considerable benefits from the deal with Amazon.

"By combining our brand name and merchandising expertise with Amazon's proven Internet expertise and distribution capability, we will be the global leader for toys, children's and babies' products on the Internet,'' he added.''

"I do happen to be in the camp that thinks the hooking up with Amazon for the dot-com venture is a move that makes a lot of sense for them,'' Bernstein's Moran said.

"There are a number of things Amazon doesn't do very well -- making money is the most obvious one,'' Moran said. "But when it comes to selling to consumers I think most people would agree that Amazon is just about best in class.''

"It would have taken Toys R Us several years and lots of money to get to a point where they were on that same level,'' she added.

Moran said improved gross margins for the company, 31.9 percent this quarter versus 30.9 percent in the prior year, as well as a push by the company to develop and sell exclusive products are also likely to boost the company's outlook.

"The really encouraging thing about that is that the company is trying shift their mix toward better margin products,'' Moran said. "Particularly in working aggressively to develop exclusive product offerings which tend to have better margins.''

Moran said the company has partnered with several companies to develop exclusive products, such as the plush "Animal Alley'' toys developed with the Animal Planet cable television station and a line of children's tools developed with home improvement retailer Home Depot Inc. (HD.N)

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