News Column

Toys 'R' Us Holiday Game Plan Serious Business This Year

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Toys "R" Us' holiday rallying cry for the last 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-based toy seller has thrown every sales-boosting weapon in its arsenal into the fight this year, 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 last week announced that its flagship store in Times Square would be open around 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 Walmart, Target and Amazon. "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 leverage 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 toy retailer's 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. Walmart 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," Samet 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."

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. This past March, after holiday and full earn years were less than expected, Moody's Investors Service changed its outlook on the company's debt to negative, from stable. Two other rating services, Standard & Poor's and Fitch, have stable ratings on Toys "R" Us. In October, Moody's issued a note saying Toys "R" Us' many holiday initiatives were a positive sign. The company, however, will need strong numbers for the quarter to back up the promise of its initiatives.

The Wayne retailer paid for some of those initiatives in its third quarter, ending Oct. 27, in which sales fell 3.4 percent, and same-store sales in the United States dropped 4.1 percent, primarily due to layaway orders, which are not counted as sales until the orders are picked up. The company, in reporting a third-quarter loss of $105 million Friday, noted that the third quarter is when it spends money to prepare for the holiday quarter.

Toys "R" Us needs a winning season during a year when it has have several strikes against it. First, competitors such as Walmart, 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.

Walmart 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 Walmart had expanded its toy offerings this year, and that Kohl's had increased the number of toys it carried by 25 percent.

Walmart, in its television advertising this year, has specifically compared its prices with Toys "R" Us, pointing out its dramatically lower prices.

Kim Noland, an analyst with Gimme Credit, said in an email that Toys "R" Us faces intense competition, particularly from Walmart, which this year "is way ahead of other toy retailers with low prices."

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," Noland said.

But she added, Toys "R" Us has instituted some good practices, such as the early opening on Thanksgiving, that could give it a boost.

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.

Johnson, in his presentation, noted that it usually takes 18 months to get a toy from the idea stage to the shelf, so the holiday 2012 toys were conceived at a time when manufacturers were worried about the economy and trying to keep costs down. "Any risky projects were likely shelved and only safe bets were brought forward," he said. "In the toy industry, safe usually means boring."

The improving economy also could be bad news for toy sellers, Johnson said, as "toy sales tend to perform the weakest when we are exiting recession." That's because parents who are feeling more confident financially may opt for a trip to Disney World, rather than buying an extra Barbie doll, he said.

Toys "R" Us also has been hit by news reports about complaints about its customer service and unfulfilled online orders that have appeared on its Facebook page. Laura Northrup, assistant editor of The Consumerist, a consumer advocacy blog owned by Consumer Reports, said Toys "R" Us is drawing more complaints about online orders this year than any other retailer.

"What's happening is one of two things," she said. "One is that the orders never get updated and they can't get any information out of Toys "R" Us." The other complaint, Northrup said, is from people who buy package deals that give them free shipping, or free merchandise when they spend a certain amount, and then are told some of the items they ordered aren't in stock and they lose the free shipping or other rewards.

"I don't know if they're more successful than they planned to be, or if they're having inventory issues due to Hurricane Sandy," she said.

Toys "R" Us spokeswoman Kathleen Waugh said the complaints reflect how busy the company's website was following Black Friday. "The number of questions to our call center and posted on our Facebook page increases proportionately with the increased business," Waugh said.

Toys "R" Us declined to comment on its holiday plans, or how the season is going so far, 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 increasing by an average of 30 percent a year in recent years.

Even blockbuster results this holiday season may not be enough to get the Toys "R" Us IPO off the shelf. "The appetite for all IPOs in today's market is tepid," said John Fitzgibbon, owner of IPOScoop.com LLC, a Rahway-based research firm. He said there are very few IPOs in the pipeline, and according to IPOScoop.com statistics, of the 127 IPOs priced this year, 41 percent are down from their initial offering price.

The Nasdaq Composite Index is in a correction phase, down more than 10 percent from its rally high from Sept. 14, he said, and when that happens, "general interest just plain dries up." To get interest in a Toys "R" Us IPO, or any IPO, "you need a bull market," he said.

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