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Toys R Us News Cheers Some, Baffles Others

Updated from 9:39 a.m. EDT

Analysts had a mixed reaction to news Wednesday that besieged toy retailer Toys R Us (TOY) will hive off its Babies R Us unit and restructure its global toy operations in an effort possibly to sell them.

The Wayne, N.J., chain, which has been struggling with waning sales in the increasingly competitive toy sector, hopes to reduce operating expenses in its corporate headquarters and U.S. toy business by more than $125 million in 2005, compared with 2003. It also wants to cut capital spending in the global toy business to less than half its annual depreciation and amortization expense, which stands at about $300 million.

The company will take about $150 million in second-quarter markdowns to liquidate toy store inventory and about $14 million in severance charges in the quarter related to the restructuring of its headquarters.

"It looks as if Toys R Us management reviewed results during June and July and are throwing in the diaper," said Richard Hastings, retail sector analyst at Bernard Sands. "The news release is somewhat confusing -- it sounds like the entire enterprise is up for grabs.

"There are certainly some ominous warnings in here: the markdowns, the severance payments, and the huge cut in spending all represent typical late-phase issues."

Shares of the company were lately down 35 cents, or 2.1%, at $16.07.

Another analyst called the news a huge positive for investors. "One of the critical pieces to unlocking shareholder value in Toys R Us is separating its crown jewel, Babies R Us," said Prudential Equity analyst Mark Rowen in a research note.

The company's strategic review was designed in part to address its waning core U.S. toy business. The company has not said when the review will be completed but said in March that it is taking longer than it thought to finish. Toys R Us' waning sales have been a byproduct of discounter Wal-Mart's (WMT - Get Report) aggressive toy pricing. The company said in March that the upcoming 2004 holiday season will be a critical time for it to maintain its competitive edge.
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