Cost cuts ahead at Toys “R” Us
A strengthened omnichannel fulfillment model helped slow the pace of sales declines at Toys “R” Us last year and now the retailer is looking to execute the next phases of transformation strategy to restore profitable growth.
The company spelled out details of its strategy on March 25 during an investor conference with presentations from Antonio Urcelay, chairman and CEO, Hank Mullany, president of Toys “R” Us, U.S. and Mike Short, executive vice president and CFO.
“A year ago, we introduced a new strategic plan, with initial efforts concentrated on strengthening the foundation of the company so revenue and profits can grow in the future,” Urcelay said. “During 2014, we made steady progress in implementing this plan, successfully delivering on our commitment to slow sales decline, stabilize cash flow and improve EBITDA. We also made significant process and organizational improvements, addressing a number of important executional issues.”
The result was global Internet sales growth throughout the year due to a strengthened omnichannel fulfillment model and U.S. margin improvement due to disciplined promotional activity and inventory managemen. The company also said its customer satisfaction metrics confirmed that changes that have been made to offer a better in store and online shopping experience.
Total sales declined 1.5% last year to $12.4 billion, but operating profits on an adjusted basis increased 10.1% to $642 million.
“Our strategy remains the same, but will evolve in 2015 as we continue to strengthen the foundation of the company in order to achieve sustainable growth in the future,” Urcelay said. “We anticipate this will be another year of significant change and we will take aggressive steps in the months ahead to further right-size the cost structure of the business. This includes designing a more streamlined organization that will allow us to create greater operational efficiencies across our global organization.”
During 2015, the company said its “TRU Transformation” strategy will focus on four key priorities:
Continue to transform the customer experience in-store and online. Initiatives underway to improve the shopping experience for customers will expand over the course of the year. Additional stores have been identified for investments in interior and exterior physical improvements, and the elevated maintenance and lighting standards introduced last year will continue in all stores.The company is also placing a renewed focus on its Babies “R” Us business, in order to strengthen its specialist position in differentiated service, products and offerings. Deeper integration with the company’s loyalty program will be concentrated on driving more special occasion visits year-round.
Optimize the e-commerce business. With e-commerce sales of more than $1.2 billion, the company is focused on growing profitably online. To do so, an end-to-end assessment of the online business is underway to identify key areas for functionality and process improvements. In the coming year, the company plans to further strengthen its omnichannel capabilities, including in-store pickup and ship from store execution, especially during the peak holiday season. Mobile growth has rapidly become the most important driver of its e-commerce traffic, with 57% of Toys “R” Us, U.S. digital visits coming from a mobile or tablet device. The company plans to work quickly to advance its mobile capabilities to better serve the needs of its customers.
Grow internationally and leverage global scale to drive category leadership and differentiation. Toys “R” Us has an international presence across 36 countries outside of the U.S. and over the coming year, the company expects to continue to grow internationally, particularly in China and Southeast Asia. It will also fully leverage its scale and worldwide presence to deliver a coordinated and strategic approach to key merchandising decisions. Twenty two of the 90 stores the company opened last year were located in China.
Right-size the cost structure and design a more efficient, streamlined organization. As part of its Fit for Growth initiative, the company continues to seek substantial cost and working capital savings opportunities through process and operating model improvements. Last year, the company identified potential cost savings of $150 million to $200 million primarily in U.S. selling, general and administrative expenses and cost of goods. Over $100 million of this was achieved in fiscal 2014 and the additional $50 million to $100 million is expected to be fully realized by fiscal 2016. In addition, the company recently identified $50 million to $75 million of potential savings in its international operations, which it expects to achieve by the end of fiscal 2016.