Santa's Surprise for Toys 'R' Us

A better-than-expected holiday shopping season, plus improving sales at remodeled stores, bodes well for the toy retailer

Amid the retailing doom and gloom of Christmas 2000, a happy surprise comes from the unlikeliest of sources -- Toys 'R' Us (TOY ). On Jan. 4, the Paramus (N.J.) retailer said it had beat freezing temperatures, a drooping economy, a bad overall retail season -- and even its own dismal history -- to produce $4.2 billion in sales during the nine-week holiday-shopping season.

After two weeks of Grinchian announcements from the likes of Wal-Mart and Federated Department Stores, Wall Street responded with elated relief, bidding up the No. 2 toy retailer's stock 22%, to $22.63 a share, a 52-week high. Shares of toymaking leader Mattel (MAT ) rose 8% to $15.54 a share, surpassing its former 52-week high, while industry rival Hasbro (HAS ) climbed 7%, to $11.63 a share.

Stock watchers say the Toys 'R' Us price pop was about more than the holiday-season sales increase of 3.5% at stores open more than a year after a 2% drop the previous year. Equally heartening was that the 166 Toys 'R' Us stores remodeled last year under a new plan to improve service and merchandising did better than average, with same-store sales rising in the "very high single digits," according to CEO John H. Eyler. Those results bode well for 2001, when several hundred more stores will be redone (see BW, 12/4/00 Cover Story, "Toy Story").


  Eyler stayed true to his promise to improve store inventory levels, which stayed close to 90%, even in the final days before Christmas. And the company's polling showed that customer satisfaction, which hit a low for the year at Christmas 1999, reached its highest level during this December rush.

"There are starting to be some believers that this is no longer the troubled retailer it was a year ago," says Bill Nygren, manager of the Oakmark Select Fund, a holder of Toys 'R' Us stock. "Toys 'R' Us didn't experience the negative December so many retailers did, but the bigger picture is the stores are doing better."

For the toy giant, which has missed its fourth-quarter expectations 14 out of the past 15 years, being in a position to predict it would meet them this year was a sweet victory. And rising sales vindicated the push into proprietary products and newly designed stores -- hallmarks of Eyler's first year at the helm. According to First Call/Thomson Financial, the company is expected to earn $1.21 in the fourth quarter, compared with 98 cents a share in the year-ago period.

Online, things weren't quite so good. Results were less than expected, even though sales tripled over the previous year., which runs its Web site in conjunction with under a deal struck early in 2000, posted holiday sales of $124 million. That's way up from what last year's numbers were before the Amazon deal but still far less than the $250 million Mark Rowen, an analyst with Prudential Securities, had been looking for.


  "The demand just didn't materialize," says Rowen, who believes rival eToys' revenue shortfall is likely to be even worse. Rowen, for one, wonders if the weaker numbers warrant a rethinking of the online toy market's potential. "Maybe toys isn't a category that will be highly penetrated online," he says. That could well be an understatement. Late in the day on Jan. 4, eToys announced it was laying off 700 of its 1,000 workers and told analysts it would not, as promised, be profitable before 2003.

But for executives at, the season was a rousing success by other measures. Fulfillment problems and outages on busy days, which plagued the site last year, were blissfully absent in 2000. "Last year at this time we were still in deep apology mode," says Jeanne Meyer,'s vice-president for corporate communications. "And now we're just tinkering with how we can improve next year."

Some of the benefits Amazon brought to the Toys 'R' Us Web site include better service -- like e-mail notifications when an out-of-stock item arrives at the warehouse. Of course, that improvement didn't help much if you were looking for Playstation 2. New shipments of this season's hottest game sold out in 30 seconds or less online. But delivery overall was greatly improved, with Amazon's last Christmas toy shipment -- a Chutes and Ladders board game -- being sent out Dec. 24. On-time delivery was above 99% in 2000, compared to 95% the previous year.

The company also benefited from rethinking how to spend its marketing dollars. For example, it ditched last season's expensive radio campaign in favor of free shipping on orders of more than $100. And in a year marked by "50% off" signs at such long-successful retailers as Gap, Toys 'R' Us didn't have to pay up to get sales, says CEO Eyler. All in all, he told analysts, the company didn't spend a dollar more on advertising and promotions than planned. And that bodes well for the strength of Toys 'R' Us earnings when they're reported in March.

By Nanette Byrnes in New York

Edited by Beth Belton

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