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Retail Industry

More turmoil for TRU

Discount Store News, Sept 6, 1999 by Cecile B. Corral

PARAMUS, N.J. -- The unexpected resignation of Toys "R" Us ceo Bob Nakasone 11 days ago was the latest blow to a company that is in the midst redefining itself against a greatly altered competitive landscape.

Nakasone cited "differing views" in closing out his 14-year career with TRU. He joined TRU as the president of USA toy stores in 1985 and four years later became president of the company's worldwide toys stores. The coo title was added in 1994. With the retirement of current chairman Michael Goldstein from day-today operations in summer 1998, Nakasone assumed his latest role as TRU's ceo.

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Although the ceo and TRU reportedly parted amicably, Nakasone's exit suggested that he and the board had come to loggerheads over the company's strategic course--or possibly over how that course should be altered.

"I saw him as someone who was really good for his company for the long term," Eugene Provenzo, a University of Miami professor and toy industry researcher. "He'd come up the ranks, and it seemed it would have taken something really big to make his move out."

Rocky leadership has been just one of the lamentable themes sounding at TRU over this past summer, which has also witnessed a musical chairs game of ceos at Web susbsidiary toysrus.com and venture capital firm Benchmark Capital's last-minute withdrawal of financial backing for the $100 million Internet venture.

Bumped into the No. 2 toy seller spot by Wal-Mart last year, TRU now finds itself searching for a new leader as it also attempts to harmonize its multi-pronged operation of toy stores, baby stores, kid's apparel stores, international operations and its e-commerce venture.

A recent Paine Webber report, published prior to Nakasone's resignation, expressed concern about TRU's long-term outlook in the face of competition from e-tailers and vendors shipping direct; potential disruptions at the store level due to the remodeling of its U.S. store base to a new prototype; and the need to drive a stronger stream of profitable sales outside of the fourth quarter.

"This was probably a very good move for Nakasone and an awful, awful disaster for Toys 'R' Us," said Seema Williams, Forrester Research toy analyst. "It strikes me as abrupt, yet it isn't very surprising considering how badly things are going at Toys 'R' Us. Wal-Mart is eating their lunch."

Former ceo and current chairman of the board Michael Goldstein was named acting ceo of the company until a replacement is found. The board of directors has already organized a search committee to work with Bob Kearson of Levy/Kearson to hire a new ceo.

The day after Nakasone announced his departure, Lehman Brothers conducted a conference call with TRU executives. Analyst Jeffrey Feiner, one of the participating analysts, said afterward that his firm is optimistic that TRU will now focus on hiring a ceo replacement promptly and will "invigorate the company's merchandising and customer-focused strategy" to win back market share.

Feiner's report noted that TRU management believes the new C-3 store prototype format has been well planned in preparation for the 1999 holiday selling season, when Nakasone had also hoped to make toysrus.com the top on-line toy retailer. So far, 80 stores have been converted to the more productive C-3 prototype, and an additional 90 conversions should be complete by December. Another 240 stores are receiving "front-end retrofits," which incorporate C-3's expanded electronics department, party headquarters assortment, seasonal shop and improved checkout. By yearend, 70% of TRU's 705 U.S. stores should have incorporated at least some of the C-3 elements.

Another positive, according to Feiner, is the implementation of EVA-driven strategic initiatives, which could increase operating earnings by about $75 million in 1999 and $150 million in 2000 and beyond.

In addition, under the $1 billion share buyback program announced in January 1998, the company has repurchased approximately 40 million shares for $880 million. "We believe management will continue to be opportunistic, repurchasing approximately $200 million in 1999," the report stated.

The new ceo will be faced with reversing seven straight quarters of earnings declines. For the six months ended July 31, net earnings for the six months ended July 31 were $27 million, including $5 million in costs for toysrus.com. Earnings in the first six months of 1998 were $33 million. Sales for the first six months were $4.4 billion, up 7.3% from $4.1 billion in the same period last year.

In the international division, where the company has shed 50 stores since September 1998, comps for the second quarter were up 6% on a local currency basis, and all TRU countries had comp increases.

One question facing TRU now is whether Wall Street will want to jump the Toys "R" Us ship along with Nakasone. The analyst community seemed to be taking the news in stride the day following the announcement. Certainly the return of Goldstein to the helm offers the best possible scenario for interim leadership. But with several pivotal initiatives in the works and the critical fourth quarter just weeks away, TRU cannot long afford to remain a rudderless ship.

Retail Industry

More turmoil for TRU

Discount Store News, Sept 6, 1999 by Cecile B. Corral

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