Toys R Us Restructuring Still on Track

Now is a tough time to invest in retailers, what with the consumer economy stumbling and the grim outlook for the key holiday shopping season.

But while near-term gains are unlikely, investors who believe the economy will rebound next year -- as many Wall Street economists are now predicting -- should consider investing in Toys R Us (TOY Quote).

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Remember that before the terrorist attacks plunged the economy into what most acknowledge is a recession, Toys R Us was in the midst of turning its fortunes around with an aggressive -- yet expensive -- store-remodeling plan. The aim: to regain market share it lost to Wal-Mart (WMT Quote), which in 1998 surpassed Toys R Us to became the biggest toy retailer in the U.S.

Those plans are largely intact. While there are near-term earnings worries -- the company recently lowered its third-quarter guidance to a loss of 22 cents a share from a previous consensus of a 10 cent loss, due to the terrorist attacks -- the company's long-range plans are on track. About 60% of its nearly 1,600 stores have been reformatted to make them easier to shop in, and the company will open its new flagship shop, the largest toy store in the world, in Times Square in November.

In addition, for the first time in more than a decade, the Paramus, N.J.-based company recently launched a major branding campaign to tout its spruced-up shops and exclusive merchandise, such as its Animal Alley plush dolls. This type of merchandise will account for about 20% of total sales this year and help differentiate the company from Wal-Mart.

The stock is up about 16.5% this year and trades at a modest 15 times next year's estimated earnings.

The downside is the slowing economy and a lack of visibility on earnings for the short term. But the company, under CEO John Eyler's stewardship, has shown it is serious about putting the luster back in this venerable retailer's name. The company grabbed some valuable market share back from Wal-Mart last holiday season, and is poised to continue that progress.

Investors with patience should take a look.

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