NEW YORK (CNN/Money) -
Toys "R" Us on Wednesday announced it is exploring a possible sale of its global toy division as well as spinning off its Babies 'R' Us unit as part of an ongoing strategic review of its business
The Wayne, N.J.-based retailer said it intends to separate ownership of the two businesses in the first half of fiscal 2005.
The company said the measures were aimed at "dramatically reducing operating and capital expenses and strengthening that business's cash flow potential."
Toys "R" Us said it hopes to "substantially" reduce operating expenses in its corporate headquarters and U.S. toy business by more than $125 million in 2005, compared with 2003.
It wants to cut capital spending in the global toy business to less than half its annual depreciation and amortization expense, which stands at about $300 million
Additionally, Toys "R" Us said it would incur $150 million in markdowns in the second quarter to liquidate inventory at select U.S. toy stores.
"The series of steps we are announcing today reflect the fact that our global toy business and our Babies "R" Us business operate in distinct markets, and are at fundamentally different phases in their growth cycle," Toys "R" Us (TOY: Research, Estimates) chairman and CEO John Eyler said in a statement.
"Consequently, by ultimately operating them as separate entities, we will provide a better opportunity for Babies "R" Us to continue its healthy growth. In addition, whatever form the separation takes, these steps should facilitate the execution of a restructured -- and substantially leaner and more focused -- global toy business that we believe can generate significant cash."
Credit Suisse First Boston was advising the company on the strategic review.
The retailer also said it would delay reporting its second-quarter results until August 23. It had been expected to announce results on August 16.
Toys "R" Us currently operates 1,200 stores, including 683 toy stores in the U.S. and 579 international licensed and franchised toy stores. Babies "R" Us is its baby products specialty store chain with 200 stores in the United States.
"We are not surprised by the news that Toys "R" Us management is preparing for a rougher ride," said Richard Hastings, retail sector analyst with Bernard Sands. "The most important elements were the big decrease in spending on the existing business, despite the smaller scale resulting from the restructurings. The mass market retail toy business remains very volatile and exposed to significant risks."
Toy retailers have struggled to recover from last year's brutal price war launched by discounters Wal-Mart and Target during the holiday shopping season. Early this year, Toys "R" Us shuttered 102 out of 146 Kids "R" Us stores and all 36 of its Imaginarium stores.
"Toys "R" Us' core business has merits, including some products that one does not find at Wal-Mart, and if they can reduce spending in other areas then maybe the company can increase spending per square foot in the remaining stores. And they need to," added Hastings.