Toys `R' Us: A Showstopper on Broadway

But will the retailer's flagship pay off?

Veteran retail analyst Donald I. Trott of Jeffries & Co. didn't become a true believer until he set foot inside the new Toys `R' Us (TOY ) flagship store in Times Square. Initially, he had a "kind of wait-and-see" attitude about it, he says. For one thing, the cost of establishing the 110,000-square-foot site must have been enormous--perhaps $32 million for construction, outsiders estimate, plus $12 million in annual rent. And given the company's many stumbles over the past decade, it was no certainty it could pull off something so ambitious.

But after visiting during opening week in November, Trott is among those cheering. "In my judgment, this will become a must-see," he says, citing attractions such as a 60-foot indoor Ferris wheel and a bigger-than-life animatronic dinosaur. "It's a great store."

GOOD PR. Once upon a time, that would have been enough. But with the chain in the middle of a tough turnaround, it's not clear that Toys `R' Us Inc. can afford a multimillion-dollar bricks-and-mortar advertisement. Though the company won't discuss the store's price tag, the Times Square site is meant to be emblematic of the changes at the company--of what CEO John H. Eyler Jr. calls "the tangible celebration of a whole new era." But critics worry that the store, which is unlike any other Toys `R' Us location, will distract management attention from the nascent remodeling of its nationwide stores and efforts to improve customer service and inventory management. That, they say, would be too high a price to pay for some good PR.

There's another reason for caution: The recent history of flagship stores is not encouraging. Tommy Hilfiger has shuttered giant palaces in London and New York. Warner Bros. Inc. is exiting retail entirely after closing a six-story Fifth Avenue cartoon wonderland last year. Manufacturers that opened some of the splashiest emporiums have realized the money-draining ventures haven't done as much for their brands as they'd hoped.

Those stores were born of the 1990s rage for supersized, bells-and-whistles showcases. The goal was to create a "destination" store--such as FAO Schwarz in New York or Recreational Equipment Inc. (REI), the mecca for the outdoorsy set near Seattle--that customers visit just for the fun of it. They served as three-dimensional ads for the brand. But for a national chain like Toys `R' Us, the payback isn't as clear. "What is that store really going to do for Toys `R' Us?" asks New York consultant Howard Davidowitz. "Every kid knows Toys `R' Us. Do you really think they're going to [expand] that brand name?"

If not, then it's very important that the store make money. CEO Eyler, a former CEO of FAO Schwarz, expects the store to turn a profit by next Christmas. But that won't be easy. It opened in one of the toughest retailing environments in years, amid fears of terrorism that are keeping shoppers closer to home. Pedestrian traffic is sharply down in Times Square since September 11.

BIG BET. Times were better last year, when Eyler signed the 20-year lease. But even then it was a big bet for a chain that has been losing share to Wal-Mart Stores Inc. (WMT ) and Target Corp. (TGT ) Management turmoil and a series of disappointing Christmases didn't help. Whereas the chain's U.S. toy stores average $10 million in annual sales, this kind of investment means the new unit has to ring up an awful lot of Barbies and Lego sets. Overall sales at Toys `R' Us will fall slightly for 2001, to $11 billion, says Legg Mason Wood Walker Inc. analyst Sally H. Wallick. She expects profits to be flat.

Nor is Times Square an easy place to do business. Toys `R' Us has devoted as much store space as possible to selling, with none set aside to replenish supplies. Everything in the store is on shelves. Deliveries come from a New Jersey warehouse in the wee hours.

Still, the location has scored points with some key groups. Quite a few investors have warmed to it, as they enjoy a 20% runup in Toys `R' Us' stock price this year. "I see the advertising and word-of-mouth value from the store as such a large number that it looks like an excellent investment," says Bill Nygren, a fund manager at Harris Associates. But as history shows, good buzz can only carry you so far.

By Nanette Byrnes in New York, with Christopher Palmeri in Los Angeles

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