NEW YORK (CNN/Money) - Toys "R" Us Inc. posted improved fiscal fourth-quarter earnings Thursday, edging past Wall Street expectations, but the retailer said it will issue $550 million in new debt and common stock to help finance a restructuring amid lackluster sales and stiffening competition.

Toys "R" Us (TOY: down $1.33 to $18.98, Research, Estimates) stock sank nearly 8 percent in midday trading Thursday as investors worried about the new stock issue diluting the value of shares, and continued sales pressure amid a costly store restructuring.

The Paramus, N.J.-based company earned $284 million, or $1.39 a share, excluding special items in the period ended Feb. 2. That's 1 cent a share better than the consensus forecast of earnings tracker First Call and up from net income of $251 million, or $1.23 a share, a year earlier.

However, net income, which includes special items, fell to $158 million, or 78 cents a share, in the latest period.

Fourth-quarter sales were flat with a year earlier at about $4.8 billion.

CEO John Eyler said the company remains comfortable with Wall Street's fiscal 2002 earnings forecasts of $1.20 a share, before the impact of new financing strategies.

Toys "R" Us (TOY: down $1.33 to $18.98, Research, Estimates) said that due to the current uncertain business environment it plans to issue $200 million in new common stock as well as $350 million of equity security units in an effort to strengthen its balance sheet. Such moves can drive down stock prices as investors worry about dilution of the value of current shares.

The new issues follows on the heels of credit downgrades by Moody's and Fitch, which cited the growing competition from discount chains among other reasons.

Toys "R" Us' profit comes amid ongoing restructuring efforts at the toy retailer, which has been battling a downturn in the economy and fierce competition from discount chains such as Wal-Mart and Target.

On Jan. 28, the company announced plans to slash 1,900 jobs and close 64 stores in an effort to refocus on its core toy business. The company had about $2 billion in debt at the end of the fourth quarter as it continued to finance the restructuring, but one analyst noted that sales are not keeping pace with its cost of capital, which adds further pressure to the bottom line and the stock.

"Sales are bad. Earnings aren't special. They've got problems," said Aram Rubinson, a retail analyst at UBS Warburg, adding that the company's fourth-quarter profit is due largely to a narrowing loss at its Internet division, rather than performance and cost-cutting in its core toy stores.

Standard & Poor's placed Toys "R" Us on credit watch in October based on concerns about fourth-quarter performance in the wake of a declining economy and the Sept. 11 terrorist attacks, analyst Diane Shand told CNN/Money.com in January.

The company slashed inventory in the fourth quarter, thanks partly to previously announced plans to shut 27 toy stores and 37 stand-alone Kids "R" Us clothing stores. In most cases, the nearest Toys "R" Us store will be converted into a "combo" store featuring toys, apparel and other Kids "R" Us merchandise.

The company operates 273 combo stores and expects to add 102 more by the end of 2002.

But some analysts are not convinced revamping the stores is enough to bolster sales.

"While management's efforts to differentiate Toys "R" Us make sense, there is still not enough evidence to conclude that the new store formats will sufficiently shield the company from the negative impact of intense price competition from the largest discounters," Moody's said in its downgrade statement Wednesday.

"We are pleased with the early signals this year," Eyler said in a conference call with analysts.

He declined to offer specific forward-looking details about the business prospects, saying the Securities Exchange Commission still has to look over the company's financing filings.

"We believe this is a very strong, stable company," Eyler said. "We are strengthening our balance sheet to ensure there's no question on the strength, liquidity and viability of this business."

Operating earnings for the U.S. toy store division increased 3 percent in the fourth quarter, excluding markdowns related to previously announced store closings. The company also plans to renovate 130 to 140 stores in 2002, converting them to a new format. An "Imaginarium" boutique will be added to an additional 100 stores.

International division operating earnings increased 2 percent in the fourth quarter from a year earlier, excluding the results of Toys "R" Us-Japan, which reports separately since going public a year ago.

The company said profit at its Babies "R" Us division were up slightly from a year earlier and that Internet sales at Toysrus.com increased 24 percent in the fourth quarter while the unit narrowed its loss by $37 million.

-- by staff and wire reports