Updated from 10 a.m. EST
Toys R Us
laid out its plans for 2004 on Wednesday, updating its ongoing operational review designed in part to address its waning core U.S. toy business, but the company acknowledged that the review is taking longer-than-anticipated to complete.
Earlier, the company reported that fourth-quarter profit dropped to nearly half that of a year earlier, hurt by charges related to its decision to close almost 200 underperforming Kids R Us and Imaginarium stores;
the decision was announced on Nov. 17.
The company also announced two positive developments. It plans to develop and expand its Babies R Us business in 2004, now that most of its Kids R Us stores will be sold to
in a new $197 million deal, announced earlier Wednesday. The company also said it expects to name a new chief financial officer in the next two to three weeks.
Shares of the company were lately up 69 cents, or 4.5%, at $15.99.
In the quarter ended Jan. 31, Toys R Us earned $144 million, or 67 cents a share, compared with $278 million, or $1.30 a share, in the year-earlier quarter. The company said net earnings for the quarter, which excluded Kids R Us closings, restructuring and other charges, were $234 million, or $1.08 a share. Analysts had been expecting $1.05 a share.
Operating earnings for the fourth quarter were $259 million vs. $462 million for the prior-year quarter.
Total sales in the quarter increased 1.4% to $4.94 billion. Excluding foreign currency benefits, total sales were $4.76 billion. Total same-store sales in its toy division fell 5.1% because of its weak video game business, which the company does not expect to pick up until another major hardware game system is announced. It noted that
said it has planned for new hardware in 2005. Total sales in the toy division fell 5.2% to $2.96 billion
Sales at Babies R Us increased 8.9% to $415 million in the quarter, while Toyrus.com sales were up 2.6% at $198 million.
In addition to its quarterly earnings, the company said in a Wednesday statement that it is "currently in the process of conducting a thorough strategic evaluation of all of our assets and operations to determine the optimal configuration and use of these resources." The process is anticipated to last a few months, but Toys R Us could not commit to an end date, as the review is "proving to be time-consuming." Credit Suisse First Boston will advise the company.
When asked by an investor on the conference call about the review, which was first announced on Jan. 8, the company acknowledged that the review was initiated in part because past operations have not resulted in a competitive U.S. toy business.
The toy business has undergone intense competition from discount stores in the past year, namely from
. Regarding this, Toys R Us said: "We know we can't do things we've continually done for the last couple years. ... We have to be very focused on what we need to do in the critical holiday season
Toys R Us would not specifically comment on the price-matching wars with
, but it did say that "in the world of the toy business, you need to be competitive."
The company concluded that it is being cautious and said that since the middle of the holiday season, it has been looking at how it can drive business in all units of the toy business. But Toys R would not speculate on future earnings, saying, "As the season develops, we'll be more open to discussion."
The company expects to open 200 to 300 new Babies R Us stores internationally and 20 new stores domestically in the new year. In addition, it will renovate about 20 U.S. stores and relocate three or four. These actions will make up about one-third of total capital expenditure spending in 2004, it said.
"We are committed to keeping this franchise fresh and sparkling," the company said.
Toys R Us said it took charges of $168 million related to the closings of 146 free-standing Kids R Us stores and its 36 free-standing Imaginarium stores, which was below its original expectation for $280 million in charges. But on Wednesday, the company said that it will sell 124 of the former Kids R Us stores to Office Depot for $197 million, plus the assumption of lease payments.
The deal is seen closing in phases in the next few months, and the company expects to gross $100 million to $150 million on the transaction. The Imaginarium stores have been closed, and half of the leases terminated.
"The transaction largely completes this portion of the Kids R Us real estate portfolio," the company said on a conference call with investors and analysts. Most of the Kids R Us stores were closed on or before Jan. 31. The company also noted that the sale of the Kids R Us stores to Office Depot occurred faster than expected and that it had "a surprisingly large number of bidders" for the sites.
The company also said Wednesday that it completed its three-year plan to term out debt, prefund its 2004 maturities and reduce its dependence on short-term debt markets in the fall of 2003.