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Toys 'R' Us beats forecast
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March 8, 2000: 3:57 p.m. ET
But competition, inventory woes plague company; Venator falls short
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NEW YORK (CNNfn) - Toys 'R' Us Inc. posted better-than-expected fourth-quarter earnings Wednesday, but inventory troubles and competition from discounters have caused difficult times for the company, which many consider a bellwether for toy retailers.
Another troubled retailer, Venator Group Inc., posted fourth-quarter earnings slightly below Wall Street's expectations.
Excluding one-time charges, Paramus, N.J.-based Toys 'R' Us (TOY: Research, Estimates) earned $276 million, or $1.15 per diluted share, for the quarter ended Jan. 29, down 15 percent from $323 million, or $1.28 per share, a year earlier. But the latest results exceeded the First Call's consensus forecast of $1.09 per share.
Including charges, Toys 'R' Us fourth-quarter profit totaled $235 million, or 98 cents per share, down from $310 million, or $1.23 per share, in the year-earlier period.
Disappointing holiday sales and a year marred by trouble keeping such popular toys as color Game Boys and Barbie dolls in stock contributed to the earnings falloff, said Ursula Moran, an analyst with Sanford Bernstein.
Well-publicized difficulties with Internet sales during the holiday also contributed to the difficult year.
On top of that, discount retailers such as Wal-Mart and Target turned up the heat in the fourth quarter, siphoning Christmas sales away from Toys 'R' Us.
"The discounters, especially Wal-Mart, have realized it is to their advantage to be very aggressive in the fourth quarter," Moran said. "...It makes life harder. The other issue, of course, is it's convenient. Since most Americans are already in Wal-Mart or Target on a regular basis, making a purchase of toys there is easier than getting back in the car and making a special trip to Toys 'R' Us, and Toys 'R' Us has had a problem with that. If you're going to be a specialty store, you've got to give people a reason to make the trip."
However, Moran and Dorothy Lakner, an analyst with CIBC World Markets Corp., both minimized the impact of highly publicized delivery problems the company had with its Internet site during the holiday season.
Despite acknowledged trouble keeping enough inventory and fulfilling orders, the company's Web site successfully completed 90-95 percent of its orders, Moran said.
"...They did draw the customers in despite all the false starts," Lakner said. "The fact that they ended up so high in the rankings is testimony to the strength of the brand."
And John Eyler, Toys 'R' Us chairman and CEO, said the company is in the midst of improving inventory and revamping its stores with a more open, easier to navigate layout.
Nevertheless, the company posted sales increases all around except for its Kids 'R' Us stores.
Fourth-quarter sales rose 2 percent to $5 billion. For the fiscal year, sales increased 6 percent to $11.9 billion, while same-store sales, or sales at stores open at least one year, increased 3 percent at domestic stores and 9 percent at Babies 'R' Us outlets.
But same-store sales fell 3 percent at Kids 'R' Us stores. The company currently operates 205 Kids 'R' Us apparel stores.
"We are reevaluating and rethinking all aspects of this business," Eyler said. Eyler, the former head of rival FAO Schwartz, took the helm of the company in January after then-CEO Robert Nakasone resigned amid flat sales and increased competition from online toy retailers.
For the full year, net earnings including charges totaled $279 million, or $1.14 per share, compared with a prior year net loss of $132 million, or 50 cents per share, on a fully diluted basis. Charges in 1999 included $86 million for setting up the company's Internet subsidiary while 1998 figures include $698 million in restructuring costs.
Venator (Z: Research, Estimates), the former Woolworth chain that now operates Foot Locker and Champs Sports stores, earned $15 million, or 11 cents per diluted share, for the quarter ended Jan. 29, excluding a 39-cent per share restructuring charge for store closings and company consolidation and other one-time items.
Not including a 1-cent per share charge for asset impairment and other items, operating income totaled 12 cents per share, trailing the First Call consensus estimate of 13 cents per share but ahead of a year-earlier loss of 22 cents per share.
Fourth-quarter sales rose 4 percent to $1.16 billion.
For the year, income excluding taxes and real estate gains totaled $41 million, or 30 cents per share, up from $11 million, or 8 cents per share, in 1998. Sales increased 2 percent to $4.06 billion.
In late afternoon trading, Toys 'R' Us stock gained 13/16 to 11-15/16, while Venator shares edged up 5/16 to 7-1/16. 
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