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 Amazon.com 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.
The Paramus, N.J.-based Toys R Us said net income fell to
$3 million, or 1 cent a share, from $12 million, or 5 cents a
share, in the 1999 second quarter. Sales declined about 9
percent, to $2 billion from $2.2 billion a year ago.
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.
Excluding losses related to the Toysrus.com operations,
which has been somewhat of a thorn in the company's side since
the 1999 holiday season, net earnings for the second quarter
were $16 million, or 7 cents a share, Toys R Us said.
President and Chief Executive John Eyler said the company's
alliance with Amazon could boost the Web business to break-even
by the fourth quarter of 2001 and to profitability by 2002.
Excluding Toysrus.com results, Toys R Us expects to meet or
beat analysts' earnings estimates for the full fiscal year
2000, Eyler said.
"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
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
Eyler said despite seeing significant short-term charges
and expenses related to moving the Toysrus.com 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,''
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
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)
Earlier this month, Toys R Us also said it plans to build
the world's largest toy story in New York's Times Square. The
101,000-square-foot (9,383-square-meter) store, complete with a
60-foot Ferris wheel, is scheduled to open in summer 2001 and