Toys "R" Us Swings to 2Q Profit

Associated Press

Toys "R" Us Inc. swung to a profit in the second quarter from a loss a year ago, buoyed by a reversal of $200 million in income tax reserves. But its overall sales fell 3.9 percent and its U.S. toy business posted a big operating loss.

The earnings report, released Monday, is the Wayne-based company's first statement since its Aug. 11 announcement that it is considering selling its worldwide toy business in the wake of fierce competition from discounters, particularly Wal-Mart Stores Inc.

The company, which is the nation's second-largest toy seller behind Wal-Mart, added little information about its plans in its conference call. Its plans also include a possible spinoff of its fast-growing Babies "R" Us division, which sells furniture, apparel, as well as accessories.

John Eyler, chairman and CEO, told analysts in Monday's conference call that a decision on the next steps in the company's strategic review would not be expected for "a number of months."

For the three-month period ended July 31, Toys "R" Us earned $61 million, or 28 cents a share. That compared with a loss of $11 million, or 5 cents a share, a year earlier.

The reversal in income tax reserves helped offset pre-tax charges of $228 million related to restructuring, markdowns and store closings.

Total sales were $2.02 billion, down from $2.10 billion in the year-ago period.

In the U.S. toy business, same-store sales, or sales at stores open at least a year, declined 7.7 percent. Same-store sales are considered the best indicator of a retailer's health.

At Babies "R" Us, same-store sales rose 1.8 percent.

In a departure from its usual practice, executives did not take questions from analysts during the conference call, disappointing some analysts.

"I can't imagine why they would reschedule an earnings call just to read a news release," said Sean McGowan, a toy industry analyst at the investment firm Harris Nesbitt. The company had delayed its earnings release by a week.

The company would most likely wait until after the holiday season to set its future course, including store closings, analysts said.

"They want to see how the fourth quarter goes. For the toy business, the fourth quarter is really make or break," said Chris Byrne, and independent toy consultant.

Eyler said that while the company's U.S. toy business had a "very challenging" second quarter, he said he was pleased with the operating performance of its international business, and Babies "R" Us.

"Maintaining an exceptionally strong balance sheet, ample liquidity and significant financial flexibility continue to be among Toys "R" Us Inc.'s highest priorities," Eyler said in a statement.

The U.S. toy business posted an operating loss of $138 million in the quarter, compared with a profit of $9 million in the year-ago period.

Operating earnings for Toys "R" Us's international division was $6 million in the quarter, up from $4 million in the year-ago period.'s operating loss decreased to $5 million from $9 million in the year-ago period.

For the first half of its fiscal year, the company reported earnings of $33 million, or 15 cents a share, compared to a loss of $37 million, or 17 cents a share, a year earlier.

Sales in the six-month period were $4.08 billion, down 3 percent from $4.2 billion last year.

Toys "R" Us said two weeks ago that it has hired Credit Suisse First Boston to advise it on any sale. It also plans to substantially restructure the company's headquarters, reducing operating expenses in the headquarters and U.S. toy business by more than $125 million by fiscal 2005 as compared with 2003.

The possible retreat from its core toy business comes after Toys "R Us has spent millions to renovate its stores and sought exclusive right to certain toys to differentiate itself from the discounters, whom it couldn't beat on price.

Toys "R" Us sells products through more than 1,400 stores, including 684 toy stores in the U.S. and 585 international toy stores, some 200 Babies "R" Us stores and over the Internet.

The company's shares rose 35 cents, or 2.24 percent, to $15.96 in early afternoon trading on the New York Stock Exchange.




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