January 12, 2015
Toys ‘R’ Us has another bad Christmas
In 2013, Toys "R" Us went heavy on the promotions during the Christmas holiday season, but it wasn’t enough to keep the chain’s quarterly comps from falling 4.7 percent in the U.S. and market share going to Amazon, Walmart, etc. This past holiday season, the chain saw sales drop another five percent. The silver lining in the Toys "R" Us cloud is that it was more disciplined with promotions, helping to raise the chain’s margins two percent.
Antonio Urcelay, chairman and CEO of Toys "R" Us, Inc., remains positive despite the decrease in holiday sales.
"I am pleased with our year-to-date performance and the actions we have taken to strengthen and transform the company," Mr. Urcelay said in a statement. "These results reflect the successful execution of our strategic plan to rationalize promotions, slow sales decline, and improve margin for fiscal 2014. I am proud of the team’s hard work and high level of focus on our key initiatives so far this year and throughout the competitive holiday season."
Last April, Toys "R" Us released what it called TRU Transformation, a new turnaround strategy that Mr. Urcelay said would address many of the "self-inflicted" wounds the company had experienced in the past. The plan involved four key areas: improving the customer experience; changing the chain’s price perception; becoming more disciplined with inventory management; and right-sizing the company’s costs on a global basis.
The company has invested in store upgrades including new floors, lighting, wider aisles and clearer signage to make stores easier to shop. The chain has also focused on speeding the checkout process for customers.
When Mr. Urcelay unveiled TRU Transformation, he said the goals for 2014 included slowing the chain’s sales decline, stabilizing cash flow and improving EBITDA to position the company to grow revenue and profits this year and in years to come.
For the year-to-date, comp sales have fallen 1.3 percent in the U.S. and 0.3 percent overall.
Toys "R" Us, which is owned by KKR and Vornado Realty Trust, canceled plans in 2013 to go public as the chain struggled to boost sales. The chain’s sales decline this holiday season comes against a backdrop of reports of improved results from many other retailers.
- Toys "R" Us, Inc. Reports Year-to-Date and Nine-Week Holiday 2014 Sales and Gross Margin Results – Toys "R" Us, Inc.
- Toys ‘R’ Us seeks to transform its business again – RetailWire
- Toys ‘R’ Us Holiday Sales Fall Again as Retail Industry Grows – Bloomberg News
- Toys ‘R’ US Holiday Period Same-Store Sales Fall – The Wall Street Journal (sub. required)
BrainTrust
Recent Discussions
Discussion Questions
Do you think Toys “R” Us is on the right or wrong track with its TRU Transformation? What will management need to do going forward to increase both revenues and profits?
Poll
I think part of the problem has to be the same as teen retailers—they know they can buy something cheaper just the same somewhere else. With the advent of sharing toys and thrift stores, and the advent of the “shut up toy” in the aisle of every supermarket, convenience store, etc., it would seem Toys “R” Us just isn’t the destination it used to be. It seems if they joined forces with Sharper Image or Brookstone, they could look to capture more of the adult business which might thwart the Millennial effect.
The struggles at Toys “R” Us point out that the big box store concept is not out of the woods yet. (Best Buy’s improving numbers are the exception to the rule.) Many of the “transformational” steps being taken at TRU strike me as “Retail 101”: Managing pricing, costs, inventory and the in-store experience are all fundamental to any successful retailer.
If Toys “R” Us gets these basics right, it is still facing some significant headwinds. The competition isn’t getting any easier, from Amazon to Target, who made toys the centerpiece of its holiday campaign this year. Meanwhile, sales continue to migrate to e-commerce and omni-channel retailers while TRU deals with too many brick-and-mortar locations.
The problem is the product. These are toys, not apparel. It is the very same toy no matter what the retailer. At Christmas when your kid’s letter to Santa say “Lego Minecraft” shopping becomes unnecessary. The objective is not “let’s browse and find an interesting toy.” The objective is buy “Lego Minecraft” and don’t make a mistake. If Toys “R” Us is handy, that works. If Walmart is handy, that works. If your computer is handy, that works, especially for me.
As I have written for the past several years, I am in charge of presents for my four grand children. I do it all online from my computer in no more than one and a half hours. What I find is exactly what I want, and to my surprise some other interesting things.
I was just thinking, when my kids were little (35 years ago) my father did the same as I do now. Of course, he didn’t have the online option. Guess what he did? He went to Toys “R” Us!
I think the poor quality of products has hurt Toys “R” Us’s sales. As a parent, it became very disenchanting to buy a toy that would break after only a few weeks, if it even lasted that long. If Toys “R” Us would narrow down its toy selection and offer high-quality toys that aren’t found elsewhere, or establish higher standards of product quality from suppliers, then I think their revenues and profits would increase. While making the stores physically look nice, it’s what is inside that really matters—and that is a need for good, sturdy toys.
The primary problem in my view is their brand. As far as I can tell, they don’t seem to stand for anything, they are just a warehouse of toys. It would be best for them to start with their brand and its meaning going forward. Find a believable place in consumers’ minds and hearts and then there will be a place in their wallets. The store changes with no meaning behind them is just a Band-Aid.
I will admit that I am not in the habit of buying or shopping for toys so I could be getting some of this wrong, but I just don’t see Toys “R” Us as special. I can get the same toys in a variety of different places and maybe at better prices.
I really liked that they did some store-within-a-store stuff the past couple of years but I’m thinking more exclusives and private lines might be a better move for them.
… and that’s my two cents.
The question is if Toys “R” Us was the benefactor of a rising tide in holiday retail shopping or if its improved results were the results of its TRU Transformation program? AN analysis of its competitive set might be indicative, but TRU does not have another direct category killer competitor. Today the company faces active competition for mass merchants and internet competitors such as Amazon.
The components of its TRU Transformation plan seem to be right on. That being said, writing a great plan is easy. The issue at retail is execution. The jury is still out on whether Mr. Urcelay can complete the turnaround of TRU, but to do so with products that are individually undifferentiated will not be an easy task.
“We only sold one toy (shirt, computer, etc.) and we used to sell 23 million, but it was at a great margin”…um, Okay.
Mr. Urcelay’s strategy, of course, involves more than just revenue, so it’s perhaps myopic to concentrate only on that element of it, but since that’s all we have, no, it doesn’t seem to be “working” since 5 > 4.7. Might the next few years see +3, +6, +11? Yes, but they might also see -.5, 0,-8.1…so at this stage there’s little to cheer about.
I think the other commenters have described the problem: TRU is neither the low cost provider, nor the quality provider (in short it’s in that retail wasteland where Mr. Death is always trying to get invited over). It seems impossible for them to be the former, and not much easier to be the latter—at least at the size they are now—so I’m not sure what to recommend. Is there even a competitor to merge with (that old standby of the unimaginative)?
It’s the right track but if the consumer doesn’t feel it, is it really happening? Based on 4th quarter performance, the answer is rather obvious.
Consumer-centric programs need to be intrusive to the customer’s shopping experience and disruptive to the shopping behavior. After almost a year of efforts and only negative results, it’s time to re-evaluate the approach.
It is on the right track, however, it might be too little too late. This specialty toy niche is rapidly moving online, and TRU is clearly behind the wave on this. Cleaning and improving their stores is great, but is VERY expensive. Instead, maximizing and optimizing their online presence would cost much less and improve their top line revenues almost immediately…welcome to the 21st century, TRU!
Two consecutive years of negative comps is not heading in the right direction. If being overly promotional in 2013 couldn’t “buy” you sales at the cost of margin then there are other reasons why consumers are not shopping your store. The remodels and focus and customer service will help the experience, but if the consumer does not view your value proposition (both price and product) then the end is near.
Maybe they should take a page from Best Buy and become a showcase for some key vendors and get help with the capex and labor expense.
The turnaround narrative seems very similar to that of another Bain Capital-owned retailer that I have inside knowledge of.
A new Chief Merchandising Officer and VP of Planning were brought in and inventory levels were cut pretty evenly across all divisions, (instead of focusing on just the slow turning, lower profit areas). This resulted in lower comp sales.
Sales are a function of inventory levels, assortment and pricing. Without the basics in place, the details don’t make much of an impact.
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I think part of the problem has to be the same as teen retailers—they know they can buy something cheaper just the same somewhere else. With the advent of sharing toys and thrift stores, and the advent of the “shut up toy” in the aisle of every supermarket, convenience store, etc., it would seem Toys “R” Us just isn’t the destination it used to be. It seems if they joined forces with Sharper Image or Brookstone, they could look to capture more of the adult business which might thwart the Millennial effect.
The struggles at Toys “R” Us point out that the big box store concept is not out of the woods yet. (Best Buy’s improving numbers are the exception to the rule.) Many of the “transformational” steps being taken at TRU strike me as “Retail 101”: Managing pricing, costs, inventory and the in-store experience are all fundamental to any successful retailer.
If Toys “R” Us gets these basics right, it is still facing some significant headwinds. The competition isn’t getting any easier, from Amazon to Target, who made toys the centerpiece of its holiday campaign this year. Meanwhile, sales continue to migrate to e-commerce and omni-channel retailers while TRU deals with too many brick-and-mortar locations.
The problem is the product. These are toys, not apparel. It is the very same toy no matter what the retailer. At Christmas when your kid’s letter to Santa say “Lego Minecraft” shopping becomes unnecessary. The objective is not “let’s browse and find an interesting toy.” The objective is buy “Lego Minecraft” and don’t make a mistake. If Toys “R” Us is handy, that works. If Walmart is handy, that works. If your computer is handy, that works, especially for me.
As I have written for the past several years, I am in charge of presents for my four grand children. I do it all online from my computer in no more than one and a half hours. What I find is exactly what I want, and to my surprise some other interesting things.
I was just thinking, when my kids were little (35 years ago) my father did the same as I do now. Of course, he didn’t have the online option. Guess what he did? He went to Toys “R” Us!
I think the poor quality of products has hurt Toys “R” Us’s sales. As a parent, it became very disenchanting to buy a toy that would break after only a few weeks, if it even lasted that long. If Toys “R” Us would narrow down its toy selection and offer high-quality toys that aren’t found elsewhere, or establish higher standards of product quality from suppliers, then I think their revenues and profits would increase. While making the stores physically look nice, it’s what is inside that really matters—and that is a need for good, sturdy toys.
The primary problem in my view is their brand. As far as I can tell, they don’t seem to stand for anything, they are just a warehouse of toys. It would be best for them to start with their brand and its meaning going forward. Find a believable place in consumers’ minds and hearts and then there will be a place in their wallets. The store changes with no meaning behind them is just a Band-Aid.
I will admit that I am not in the habit of buying or shopping for toys so I could be getting some of this wrong, but I just don’t see Toys “R” Us as special. I can get the same toys in a variety of different places and maybe at better prices.
I really liked that they did some store-within-a-store stuff the past couple of years but I’m thinking more exclusives and private lines might be a better move for them.
… and that’s my two cents.
The question is if Toys “R” Us was the benefactor of a rising tide in holiday retail shopping or if its improved results were the results of its TRU Transformation program? AN analysis of its competitive set might be indicative, but TRU does not have another direct category killer competitor. Today the company faces active competition for mass merchants and internet competitors such as Amazon.
The components of its TRU Transformation plan seem to be right on. That being said, writing a great plan is easy. The issue at retail is execution. The jury is still out on whether Mr. Urcelay can complete the turnaround of TRU, but to do so with products that are individually undifferentiated will not be an easy task.
“We only sold one toy (shirt, computer, etc.) and we used to sell 23 million, but it was at a great margin”…um, Okay.
Mr. Urcelay’s strategy, of course, involves more than just revenue, so it’s perhaps myopic to concentrate only on that element of it, but since that’s all we have, no, it doesn’t seem to be “working” since 5 > 4.7. Might the next few years see +3, +6, +11? Yes, but they might also see -.5, 0,-8.1…so at this stage there’s little to cheer about.
I think the other commenters have described the problem: TRU is neither the low cost provider, nor the quality provider (in short it’s in that retail wasteland where Mr. Death is always trying to get invited over). It seems impossible for them to be the former, and not much easier to be the latter—at least at the size they are now—so I’m not sure what to recommend. Is there even a competitor to merge with (that old standby of the unimaginative)?
It’s the right track but if the consumer doesn’t feel it, is it really happening? Based on 4th quarter performance, the answer is rather obvious.
Consumer-centric programs need to be intrusive to the customer’s shopping experience and disruptive to the shopping behavior. After almost a year of efforts and only negative results, it’s time to re-evaluate the approach.
It is on the right track, however, it might be too little too late. This specialty toy niche is rapidly moving online, and TRU is clearly behind the wave on this. Cleaning and improving their stores is great, but is VERY expensive. Instead, maximizing and optimizing their online presence would cost much less and improve their top line revenues almost immediately…welcome to the 21st century, TRU!
Two consecutive years of negative comps is not heading in the right direction. If being overly promotional in 2013 couldn’t “buy” you sales at the cost of margin then there are other reasons why consumers are not shopping your store. The remodels and focus and customer service will help the experience, but if the consumer does not view your value proposition (both price and product) then the end is near.
Maybe they should take a page from Best Buy and become a showcase for some key vendors and get help with the capex and labor expense.
The turnaround narrative seems very similar to that of another Bain Capital-owned retailer that I have inside knowledge of.
A new Chief Merchandising Officer and VP of Planning were brought in and inventory levels were cut pretty evenly across all divisions, (instead of focusing on just the slow turning, lower profit areas). This resulted in lower comp sales.
Sales are a function of inventory levels, assortment and pricing. Without the basics in place, the details don’t make much of an impact.