Real estate, not toys could help Toys ''R'' Us

Posted: Friday, August 20, 2004

NEW YORK (AP) Toys ''R'' Us Inc. might finally have something that Wal-Mart Stores Inc. can't undercut in price: Its real estate holdings.

Now that the struggling toy chain has said that it may be ready to sell its core toy business after fighting a losing battle against the massive merchandise discounting employed by Wal-Mart, its most lucrative move may be to sell off many of its store sites.

Barbie dolls you can buy anywhere, but these days, prime real estate is mighty tough to find.

These aren't good times for the retailer that was once considered a ''category killer.'' Just a decade ago, it was known for its ability to drive smaller toy operators out of business with its large assortment and cheap prices.

Then came Wal-Mart's move into toys. It is a force Toys ''R'' Us hasn't been able to fend off, though it has tried and tried by doing everything from repeated reconfigurations of its stores to carrying more exclusive products.

In 1998, Wal-Mart overtook Toys ''R'' Us as the nation's biggest seller of toys, and its dominance has only increased since. Today, estimates put its share of total retail toy sales at around 23 percent versus about 16 percent for Toys ''R'' Us.

It's not that Wal-Mart offers a better assortment of toys or a superb shopping experience. Wal-Mart stores carry about a third of the 9,000 products found in most Toys ''R'' Us stores, and does little to woo consumers through store design.

But Wal-Mart wins on price. Toys ''R'' Us can't keep up.

The trouble is that Wal-Mart is only sharpening its attack. Just look what it did last Christmas by cutting prices on the hottest holiday toys as early as September, and going for broke on some key items well before Toys ''R'' Us had even started promoting its holiday lineup.

Such pricing pressures are eating away at Toys ''R'' Us' bottom line. The Wayne, N.J.-based company first-quarter loss increased by 8 percent to $28 million from a year ago, while sales declined nearly 3 percent to $2.06 billion. It will report second-quarter results next week.

With its business struggling, the company announced last week that it was going through yet another restructuring and was considering the sale of its toy business.

''The toy supermarket doesn't work anymore, not with the discounters in the picture,'' said toy business consultant Chris Byrne. ''Anyone who bought it would be a fool to maintain that business model.''

And chances are there won't be too many buyers lining up to take over Toys ''R'' Us as it stands.

There could be some demand for a scaled-down, leaner version of the company with its worst-performing stores stripped out. Toys ''R'' Us currently operates 683 stores in the United States and 579 abroad.

Maybe best suited to take over would be private investors who aren't so focused on growing profits but like the operations for its cash-generating value. Then they can use those funds to support other areas of their businesses, and don't have to answer to investors who are angry over slumping profits and market share.

The retailer's best option, though, may be putting up its parts for sale. That's where the real estate holdings could pay off, with analysts estimating that they could fetch far more than the $2.3 billion that they have been valued at.

Toys ''R'' Us has stores in cities around the country, many of which are in popular shopping locations. And its big-box format could be attractive to other retailers looking to expand into certain regions.

This wouldn't be such a far-fetched idea for Toys ''R'' Us. Demand was strong when the company sold off its Kids ''R'' Us properties earlier this year. More than 100 of the 146 stores were sold to Office Depot for around $180 million.

And it's a strategy that other retailers have used with great success. For instance, Kmart Holding Corp.'s sale of as many as 73 stores for close to $1 billion to the likes of Home Depot Inc. and Sears, Roebuck & Co. has been cheered by investors. Kmart's stock has more than quadrupled in value from the time the retailer emerged from bankruptcy court protection in May 2003 to today.

Toys ''R'' Us doesn't have ''a business that will likely be turned around, but it can return a lot of cash, which could be attractive to someone, and has a lot of prime real estate in its portfolio,'' said Sean McGowan, a toy industry analyst at the investment firm Harris Nesbitt.

Any money that the retailer can drum up will be put into building the operations at its profitable Babies ''R'' Us stores, which caters to new parents and their children. It's a business that is not as holiday focused or driven by the whims of kids much different from how its toy division operates.

And right now, Babies ''R'' Us is the market leader, without much significant competition in sight.

That is, until Wal-Mart comes along.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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