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Continued: Toys R Us battles to keep market share, sustain IPO hopes

  • Article by: JOAN VERDON , The (Hackensack, N.J.) Record
  • Last update: December 13, 2012 - 9:09 PM

Toys R Us' holiday rallying cry for the past six years has been: "We're playing to win." This year, they're not playing. It's war -- a dead-serious battle to hang on to market share won over previous years and to show Wall Street it can grow its sales.

The Wayne, N.J.-based toy seller has thrown every sales-boosting weapon in its arsenal into the fight, launching an unprecedented number of special deals and new marketing strategies. Since September, it has announced 13 major holiday initiatives. Toys R Us has expanded layaway and waived layaway fees, promised it would match competitors' prices, opened earlier than ever on Thanksgiving and announced its flagship store in New York's Times Square would be open round-the-clock for the final 543 hours leading up to Christmas.

Jim Silver, a veteran toy industry authority and editor of Timetoplaymag.com, a toy-review website, said Toys R Us is being "much more aggressive than ever before" in terms of competing with rivals such as Wal-Mart, Target and Amazon.com.

"Their [strategy] this year is they're not going to lose the business for not trying," Silver said. "They're going to make every effort to get the customer to Toys R Us," unlike past years, when they relied too heavily on their status as the best-known toy retailer.

In past years, efforts by Toys R Us to ramp up holiday sales have been seen as a sign the company, which was taken private in a leveraged buyout in 2005, was finally preparing to move forward with the stock offering that has been in the works since Bain Capital, Kohlberg Kravis Roberts and Vornado acquired the toy retailer. Toys R Us registered for an initial public offering in May 2010 after reporting its best holiday results in more than a decade.

That IPO, however, has been on the shelf so long -- stalled by an unfavorable climate for IPOs and by two holiday seasons in which Toys R Us missed expectations -- that it no longer is the primary driving force behind the holiday game plan. Instead, industry experts said, the new reality is Toys R Us has to be this aggressive every year, because if it can't win the holiday toy battle, it might as well get out of the game.

"It's a survival mode," said Jonathan Samet, publisher of The Toy Insider. "This is all they do. Wal-Mart sells a lot of products besides toys. Amazon sells a lot of products besides toys. Toys R Us sells toys."

"They're not looking five or 10 years down the road," he said. "They need to be successful this year and in the short term, especially if they are planning to go public again. They have to show increased sales revenue and profitability."

Protecting credit ratings

In addition to keeping the hope of an IPO alive, Toys R Us needs to show healthy holiday sales to protect the credit ratings it needs to refinance the debt it was saddled with as a result of the leveraged buyout. In March, after holiday and full-year earnings were less than expected, Moody's changed its outlook on the company's debt to negative from stable. Two other ratings services, Standard & Poor's and Fitch, have stable ratings on Toys R Us. In October, Moody's said Toys R Us' many holiday initiatives were a positive sign.

Toys R Us needs a winning season during a year when it has several strikes against it. First, competitors such as Wal-Mart, Target and Kohl's have increased their toy marketing and discounts this year as a way to lure shoppers into their stores in hopes they will also pick up some higher-margin, non-toy merchandise.

Wal-Mart typically uses sought-after toys as loss leaders every year. Gerrick Johnson, toy analyst for BMO Capital Markets, said in a holiday forecast presentation last month that Wal-Mart had expanded its toy offerings this year, and that Kohl's had increased the number of toys it carried by 25 percent.

Toys R Us also has been hit by the fact that "a fair portion of holiday sales are switching to online retailers such as Amazon, and although [Toys R Us] is emphasizing its e-business, they came to the party late," said Kim Noland, an analyst with Gimme Credit.

But, she added, Toys R Us has instituted some good practices, such as the early opening on Thanksgiving.

Industry outlook

Industry experts are expecting that, despite the aggressive marketing, overall sales this holiday will be 2 percent or more less than last year, driven largely by declining video game sales, and a dearth of "must-have" toys.

Toys R Us declined to comment on its holiday plans, or how the season is going, saying no executives were available for interviews this week.

Chairman and Chief Executive Officer Jerry Storch, in interviews earlier this year, and in September when he unveiled the first holiday initiatives, said he expected sales to get a boost from the release of the Wii U, the first new gaming console in several years; the launch of Tabeo, a kid-friendly tablet computer sold exclusively by Toys R Us; and the company's rapidly growing Internet sales, which have been rising an average of 30 percent a year in recent years.

  • related content

  • Toys R Us is using a host of strategies this holiday season as it battles other toymakers and strives to generate the kind of business that its store in Saginaw Township, Mich., had on Black Friday.

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