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Toys ‘R’ Us posts Q4 loss; store updates part of new ‘transformation’ strategy


New York -- Coming off a disappointing 2013, Toys “R” Us unveiled a strategic plan to position the company for profitable growth in the future. The plan includes improving its in-store and online shopping experience, simplifying promotions, cutting costs, more disciplined inventory management, and more omni-channel integration with stores. Significantly, it not include closing stores apart from those involving standard lease expirations, top company executives said during a media presentation on Tuesday at the chain’s flagship in Times Square.

“Reports of us closing a large number of our stores in the United States are not accurate,” said Antonio Urcelay, chairman and CEO, Toys “R” Us, who added that the majority of the chain’s U.S. store fleet is “very profitable.”

Toys "R" Us disclosed its new strategy on the heels of posting a loss of $210 million for its fiscal fourth quarter ended Feb. 1, compared with a profit of $239 million in the year-ago period. Net sales fell 8.7% to $5.27 billion (the year-ago period benefited from an additional week). Same-store U.S. sales fell 4.1%; international comp-sales fell 2.2%. The company posted a loss of $1 billion for the year, which it attributed mainly to two significant non-cash charges (excluding the items, it would have had a net loss of $312 million).

Urcelay, a 17-year company veteran who was named CEO in October, said the company’s “transformation strategy” is based on extensive customer research and customer insights.

The plan will focus on several key priorities, with the foremost being improving the customer experience in-store and online.

“Customers feel our stores need a better execution,” Urcelay said.

Toys “R” Us is updating its existing stores to make them easier to shop, focusing on everything from the restrooms and lighting to the flooring and signage. It also is committed to reducing in-store clutter, and improving in-stocks and checkout speed (slow checkouts registered as a big customer complaint in its research.

“We are also developing a store of the future,” said Hank Mullany, president, Toys “R” Us U.S., with a prototype unveiling likely in late 2014.

The chain also plans to identify and test future store concepts. It also will no longer focus on putting its Toys “R” Us and Babies “R” Us stores side by side.

“We completed the planned rollout of the side-by-side stores,” Mullany said. He added that the chain learned that Babies “R” Us customers do not like the side-by-side environment as much as they do the standalone concept.

On the online side, Toys “R” Us said it is improving navigation on its website and will update its mobile apps and website speed. It is optimizing its e-commerce experience with improved inventory accuracy and order status communication, along with improved ship from store execution. It also will continue to improve its in-store pick up integration.

“We started last year to transform some of this, and are starting to see results,” Urcelay said.

Poor inventory management and excessive promotional activity have put pressure on the company’s U.S. margins, the CEO said. The chain has already started to implement new processes to improve its store level and fulfillment center in-stocks.

“We want to make sure our inventory is fresh and that we have the items customers want,” Mullany said.

The executives said the chain suffered from a “price perception” problem among consumers. To correct it, the retailer plans to better communicate its ‘price match’ guarantee and simplify its pricing messages and “exclusive” promotions.

“Our prices are seen as too complex and too confusing by customers,” said Mullany. “We are developing a clear pricing strategy and simplifying our promotional offers. We have to make it simpler for our customers. We are putting them at the center of everything we do.”

Another priority of the chain’s new strategy involves a ‘right-size’ of its cost structure to determine where greater efficiencies can be created. The retailer has cut 500 jobs globally, including 100 in its Wayne, N.J., headquarters. It is closing a distribution center in Storey Country, Nevada, as it continues to integrate online and in-store operations and expand its ability to ship online orders from stores and distribution centers that serve stores.

Moving forward, the company will also better utilize its 18 million members strong Toys “R” Us loyalty program with more targeted and customized messages.

Urcelay emphasized the financial health of the company, which he said has no significant near-term debt maturities. It recently completed the successful refinancing of its $1.8 billion debt.

“We also have very strong liquidity,” Urcelay said. “We have a couple of years to get this business right.”

Mullany said that 2014 will lay the foundation for the company to grow in 2015 and beyond.

In an encouraging sign, the current year is off to a good start, with a 3.5% rise in same-store sales in Toys “R” Us U.S. stores and a 0.2% rise internationally.

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