Toys R Us Posts Operating Loss Amid Poor Sales

NEW YORK – Toys R Us Inc. (TOY), which is considering getting out of the toy business, on Monday posted a second-quarter operating loss on poor sales of video games and markdowns on older merchandise.

The No. 2 toy seller, hit hard by competition from discounters such as Wal-Mart (WMT), said sales fell 3.9 percent, and sales at U.S. toy stores open at least a year were especially weak.

But Harris Nesbitt analyst Sean McGowan said, "If you strip out everything, it's a little better than expected. Same-store sales performance was a little worse than expected, but the profit on those sales was a little better."

Toys R Us shares were up 2.7 percent at $16.03 on the New York Stock Exchange (search).

The company posted an operating loss of $192 million, compared with operating earnings of $14 million a year earlier.

The loss included pre-tax charges of $228 million.

On a net basis, the Wayne, N.J.-based retailer posted a profit of $61 million, or 28 cents a share, helped by a $200 million tax reversal. A year earlier, it had a net loss of $11 million, or 5 cents per share.

Earlier this month, Toys R Us said it is considering selling its toy business to focus on its faster-growing Babies R Us unit. It said it plans to separate the ownership of the two businesses.

"There are two issues here: How is current business doing and what's going to happen to this corporation?," said McGowan. "The answer to the first question is, 'Struggling but making progress.'

"In terms of what's going to happen to the corporation, (the earnings report) tells us nothing."

On its conference call, Toys R Us said it would not have a question-and-answer session.

Second-quarter sales fell 3.9 percent to $2.0 billion. Sales at U.S. stores open at least a year, a key measure of retail strength known as same-store sales, fell 7.7 percent.

Same-store sales at international toy stores were up 1.7 percent in local-currency terms.

Excluding the impact of currency translation and a $68 million decline in sales associated with the previously announced Kids R Us (search) store closings, total sales fell 2.2 percent.

Babies R Us (search) same-store sales rose 1.8 percent, while sales at Toysrus.com (search) were flat.

The reversal of $200 million of income tax reserves resulted from the conclusion of an Internal Revenue Service review of the company's tax filings for 1997 through 1999.

Toys R Us ended the second quarter with $1.1 billion in cash and cash equivalents. At July 31, total inventories were down 14 percent from a year earlier.