Toys 'R' Us, the biggest toy retailer in the US, is closing 25 stores world-wide and taking a $270m charge against fourth-quarter 1995 earnings in a bid to stay ahead of increasingly aggressive competitors such as Target and Walmart.
The company said its charge would cover the cost of a restructuring that involves dumping less popular toy lines and overhauling inventory, closing 15 stores in the US and 10 in Europe, consolidating three distribution and seven administration centres world-wide and making accounting changes costing $24m.
Michael Goldstein, the company's chief executive officer, said the move was aimed at increasing profits in 1996 and beyond, raising return on equity and improving cash flow.
"We believe that between the reduction in our cost structure and the benefits anticipated from repositioning our merchandise offerings, the restructuring should provide at least a $50m benefit to operating earnings in 1996 and a greater amount in 1997 and thereafter," Mr Goldstein said.
Based on preliminary results, Mr Goldstein estimated 1995 operating profits before the restructuring charge to be about $590m for the fourth quarter and $740m for the full year ending 3 February.
That would equate to earnings per share of about $1.30 in the fourth quarter from $1.46 in the previous corresponding period and about $1.50 for the full year ($1.85).
The restructuring comes as Toys 'R' Us, once hailed as a trend-setter in the international retail industry with its idea of providing low- cost speciality supermarket chains selling only toys, was suddenly being threatened by general retailing giants such as Walmart.
"This restructuring is an overdue move," said Sean McGowan, retail analyst at Gerard Klauer Mattison in New York.
"The most important issue in this industry is retail competitive pricing.
"Toys 'R' Us dominated this business based on lower prices, but in the last five years Walmart, Target and Kmart have become bigger factors and even more competitive on price - particularly Walmart and Target because they use toys to help build traffic for the whole store. In many instances they sell toys at cost."
Walmart is the second-largest toy retailer in the country and growing faster than Toys 'R' Us.
The inventory overhaul will save Toys 'R' Us money and rid its stores of cluttered aisles. Instead it will focus on products with the greatest impact on consumers.Reuse content