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Toys R Us Loss Widens

The company sees a 27% decline in video game sales.
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Updated from 10:01 a.m. EDT

Toys R Us


said its first-quarter loss widened from a year ago, missing forecasts, as a plunge in video-game sales and liqu1idations by its competitors ate into the top line.

The retail chain lost $28 million, or 13 cents a share, in the latest quarter, compared with a loss of $26 million, or 12 cents a share, a year earlier. Overall sales were $2.058 billion in the three months ended May 1, 2004, compared with $2.113 billion a year ago. There was a pretax restructuring charge of $15 million in the latest quarter.

Analysts surveyed by Thomson First Call were forecasting a loss of 1 cent a share on sales of $2.185 billion in the most recent quarter. The shares were down 23 cents, or 1.6%, to $14.15.

Toys R Us ended the quarter with about $1 billion of cash and equivalents on its balance sheet. The company saw its debt rating cut to junk status in late March by Moody's, citing the difficulty of competing with discount behemoths like


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. The company announced last year that it is closing about 182 Kids R Us and Imaginarium stores, most of which was completed by the end of January.

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On Monday, Moody's bond analyst Charles O'Shea said Toy R Us was making the right moves, unloading its Kids R Us business and expanding Babies R Us, a business with less seasonal vulnerability than the flagship toy retail operation, which makes most of its money in fourth-quarter holiday sales. While Wal-Mart and Target won't go away, the company can still compete, he said.

"The things they can do, they have done a pretty decent job of doing," he said. "They went to the capital markets while they were still investment grade, they have no maturities coming due immediately, and they got rid of Kids R Us at, I would say, lightning speed. They're making decisions and they're executing."

Among its segments, the company said, the U.S. toy division saw same-store sales fall 5.6% in the current quarter from a year ago, including a 27% decline in video-game sales. Still, the company was able to improve margin and inventory in the division and kept its operating loss to $14 million, compared with $11 million last year.

O'Shea said the video game slump happened at all toy retailers, because manufacturers such as


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have not unveiled new console machines in three years. Prices have dropped and the market is saturated, he said.

"It's more of nuisance than anything else with video -- they're in the business, it's going to be soft, and there's not a whole heck of a lot anyone can do about it," he said.

O'Shea said Toys R Us management could only control how they react to the current video game market as retailers await the successors to Sony's PlayStation and Microsoft's Xbox.

"We effectively improved margins and controlled expenses and inventory levels during the quarter to offset most of the impact of the sales decline in our toy and video-game businesses," the company said.

The stock was down $1.01, or 7%, to $13.37. It remains about 60 cents in the green for the year, but is well off the 52-week high of $17.44 touched on April 6.