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Toys 'R' Us 1Q short
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May 21, 2001: 11:33 a.m. ET
Retailer reports wider-than-expected loss as it spends on improvements
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NEW YORK (CNNfn) - Toys "R" Us Inc. reported a wider-than-expected first-quarter loss Monday as the No. 2 U.S. toy retailer continued to invest in steps to improve its business that drove up costs in the quarter.
The company also said it expects the investments to hurt results later this year, though it remains comfortable with Wall Street's estimates for the full year. Analysts surveyed by earnings tracker First Call are forecasting earnings of $1.39 a share for the full year.
Despite the results, Toys R Us (TOY: up $1.01 to $29.60, Research, Estimates) stock moved higher in morning trading Monday.
Analysts are generally upbeat on Toys' efforts toward ramping up for the all-important holiday season in the fourth quarter. But with tightening competition from discount chains like Wal-Mart, Kmart and Target, the continued lack of a hot "must-have" toy and cooling economy, the success of the strategy remains a question.
Same-store sales are a key gauge for retailers since they provide a truer sales picture by excluding sales from stores that opened during the year.
"I think ultimately they will do better than they have done in some years," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "There's no question the much more attractive stores will pay off in terms of improvement, but will they be able to come through with big earnings? The jury's still out."
For the quarter ended May 5, the Paramus, N.J.-based retailer reported a net loss of $18 million, or 9 cents a share, compared with earnings of $15 million, or 6 cents a share, excluding one-time items, a year earlier. Analysts had expected a loss of 6 cents a share, according to First Call.
Including a one-time pre-tax gain from the initial public offering of Toys "R" Us Japan, the company reported income of $215 million, or 93 cents a share, in the year-earlier quarter.
The company said disruption caused by the construction of new stores and refurbishing existing stores, coupled with a soft retail environment, caused a 2 percent decline in sales at stores open at least a year, or same-store sales.
"In line with the plans we previously described, the investments we are making throughout our business will negatively affect our financial performance during the first three lower revenue quarters of the year," CEO John Eyler said. "However, we are confident that the improvements being made will deliver substantial benefits to Toys 'R' Us by this year's more important holiday season and will allow us to better grow and enhance our business well into the future."
Toys "R" Us is remodeling its stores, trying to improve service and manage inventories better, and also strengthen its Internet alliance with Amazon.com.
Morgan Stanley retail analyst Bruce Missett said the quarterly loss mainly reflects the company's spending to ramp up service and its stores in time for the holidays along with the slowdown in consumer spending. However, he points out that the loss came in relatively narrow considering these factors.
While most retailers have struggled as consumers cut back because of the slowing economy, Toys "R" Us has reaped benefits from its partnership with Amazon.com (AMZN: Research, Estimates) forged last holiday season. Toys "R" Us teamed its Web site, toysrus.com, with Amazon in an online venture that raked in toy sales during a holiday that was grim for most retailers.
Sales from the Web site more than tripled in the first quarter to $29 million from $8 million a year ago. The company announced that its Babiesrus.com business would migrate to the Amazon platform later this month, which should help cut costs.
The company also is opening a new flagship store in New York's Times Square. Toys "R" Us warned in March that costs would rise in the first three quarters of its current fiscal year as it rolls out its refurbished stores.
Analysts at the time of the warning anticipated a first-quarter loss of a penny a share and full-year earnings of $1.43, according to First Call. Both estimates were subsequently lowered.
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Sales for the quarter edged up to $2.1 billion from $2 billion.
In addition to the Toys "R" Us stores, the company operates the Babies "R" Us and Kids "R" Us chains. 
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