Editor's Note: Arne Alsin's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Dec. 6 on RealMoney.

Turnarounds take time. They're often long, languid affairs. Success in turnaround investing requires you to recognize that progress will often be made in fits and starts. Both of my turnaround picks this week have been struggling for a while to regain their footing.

Toys R Us

While the market doesn't recognize this company as such -- at least not yet --

Toys R Us

(TOY)

is one of the great franchises in America. It hasn't been a great stock, though. It traded 50% higher than the current quote more than 10 years ago.

I disagree with those who say

Wal-Mart

(WMT) - Get Report

is the biggest challenge facing Toys R Us. Wal-Mart competes with Toys R Us, to be sure, as it does with

Barnes & Noble

(BKS) - Get Report

,

Safeway

(SWY)

,

Walgreen

(WAG)

and

PetsMart

(PETM)

. Wal-Mart sells books, groceries, prescription drugs and pet supplies -- and toys. But Wal-Mart has enough disadvantages, including a lack of selection and service, that it will never take over these categories.

Toys R Us has been attempting to turn around operations for a few years. After a few false starts, evidence that the turn is finally taking hold is starting to accumulate:

  • Category dominance: If you want the best shopping experience in the toy category, there's only one place to go, either in the physical stores or online through ToysRUs.com. In the past year, market-share trends for Toys R Us and the discounters have actually reversed, with Toys R Us gaining share and building momentum.
  • Exclusive brands: Private labels used to be a small portion of Toys R Us revenue. Not anymore. By next year, about 20% of Toys R Us sales may be from exclusive products. Animal Alley, a Toys R Us-exclusive line of plush animals, has come from nowhere to become the largest brand of plush animals in the world in less than two years.
  • Store redesign: There is no atmosphere quite like a Toys R Us store, especially the newly remodeled design that the company calls "Mission Possible." More than 60% of its stores have been remodeled in this more exciting format, with the balance to be done in 2002. Sales at the new stores are running 7% higher based on the same level of traffic.

What else will drive Toys R Us' re-emergence as a premier retailer? Other catalysts include a strong management team led by John Eyler (who started in January 2000, coming from

FAO Schwarz

), dramatic improvements in supply-chain management and significant improvements in customer service.

My calculations suggest that Toys R Us can earn close to $3 a share in a couple of years, which suggests that a $45 longer-term target price is reasonable, using a 15

price-to-earnings ratio, well within the historical range. The stock closed Wednesday at $22.40.

Spherion

Spherion

(SFN)

is a leading temporary-staffing company. It has a diverse skill set that includes staffing, consulting, recruitment and outsourcing, with substantial exposure to the technology industry. It's a $530 million company with a revenue run rate of $2.4 billion. Take a look at its five-year chart.

Spherion's Struggles
New management sets it to get back on track

The last cycle provided excess capital to companies, which often used it to expand well beyond what was justified. Spherion was no exception, as it opened too many branch offices in too many countries and offered too many types of services.

Enter new CEO Cinda Hallman in April 2001 to bring discipline and direction to Spherion's business model. Since taking the helm, Hallman has introduced several initiatives to get Spherion back on track.

The business is now more focused on increasing outsourcing/contract revenue (more predictable than the temporary-staffing biz). Also, the company has closed many underperforming retail branches and is zeroing in on profitable key markets.

I'm particularly impressed with the margin leverage in this company. Spherion has gotten lean and mean in front of a cycle upswing. Look for earnings to jump to $1 per share or more by 2003. A 15 P/E is reasonable, suggesting a target price of $15 or so in 12 to 18 months. Shares closed Wednesday at $9.60.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin and/or ACM was long Toys R Us and Spherion, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to

arne@alsincapital.com.