One Toy Story Not Going to Infinity and Beyond

Kids are the toughest, most demanding demographic to satisfy. They want -- no, need -- new toys to play with all the time. And for a long time, Toys R Us(TOY) was a parent's primary source of all of the latest gadgets and high-tech video games.

But over the past several years, big-name discounters have started to steal its thunder. Companies like Kmart(KM), Target(TGT) and Wal-Mart(WMT) now offer a vast selection of toys. And their prices are often far superior to those of Toys R Us.

Of course, this doesn't mean that the company lacks a niche. Truth is, if you need a deep selection, or if you are looking for a specific type of Barbie or G.I. Joe (say, the one with a Kung Fu grip), perhaps Toys R Us is your best bet. But any way you slice it, the company isn't the toy Mecca it used to be.

Of course, you might be thinking that with the Halloween and Christmas seasons coming up, now might be a good entry point.

Maybe for a quick trade. But the company's ability to compete over the long haul is a big question mark. And its lack of operational cash flow, lackluster balance sheet and inability to pick up market share from the above-mentioned discounters does little to convince me the stock is any sort of bargain right now.

How about its potential for future earnings growth? After all, the sell-side figures the company will earn 95 cents a share in fiscal 2002, which ends in January, and $1.31 a share in fiscal 2003.

Well, I'd suggest not holding your breath waiting for the company to meet those estimates. The fact is, management recently scaled back their third-quarter forecast to a loss of 22 cents per share (from a loss of 10 cents), and I think further downward revisions are likely, particularly if the company is caught with a bunch of inventory at year-end.

The bottom line is that Toys R Us is now a small fish in a really huge pond. Discounters have totally changed the landscape of the toy business. And I'm not sure the company has what it takes to make a comeback.

Who won today's Face-Off? Tim Arango Glenn Curtis

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