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A TOY STORE'S STORY // PLAYING CATCH-UP

Standing on the top floor of the Toys "R" Us store in Santa Monica, Calif., far above the endless racks of Monopoly games, Barbie dolls and coloring books, Diane Summers Craig was very much alone.

"Hello? Hello? Is anyone here?" Craig called out as she perused a deserted aisle of computer software.

At last, a clerk wandered over to help her, but acknowledged that she did not really know the differences among the computer programs for sale.

In a few minutes, another clerk came, but couldn't help either. "No one here really knows anything," huffed the mother of two young children before turning on her heel and leaving.

Wall Street has known for a while that the world's largest toy retailer is troubled. After 16 consecutive years of uninterrupted growth, the company's earnings took a 72 percent nose dive in the fiscal year that ended Feb. 2, to $148-million, largely because of a hefty restructuring charge.

Further, in a bull market in which the Standard & Poor's 500-stock index has risen more than 40 percent since the beginning of 1995, the stock price of Toys "R" Us has declined about 11 percent.

Company shares, which went for $42.87{ at the end of 1993, stagnated in the $20s for most of 1995, and closed Friday at $26.75, up $1. The company has lost a staggering $5.2-billion in market value, weighing in these days at $7.5-billion.

Michael Goldstein, the chief executive of Toys "R" Us, has big plans to stem the bleeding. But he is caught in the classic quandary of the turnaround artist: If he spends too much revamping his stores, he could wreck his already shaky profit margins; if he spends too little, his efforts may come to naught.

Analysts give a variety of reasons for the reversal of fortune at Toys "R" Us, which just over a decade ago was rolling over its competition like a Tonka truck lumbering down a grassy hillside.

They speak of discount stores like Wal-Mart and Target ratcheting up the competitive pressure; of a dearth of creative new toys; of the fading popularity of the Power Ranger action figures, which accounted for huge sales the previous year.

But it is those retail analysts with children, the ones who have made a Saturday afternoon venture into that dizzying landscape of bikes, Barbies and bath toys, who know what parents indifferent to market issues have known for years: While Toys "R" Us has what they're looking for, getting it can come at a cost to their sanity.

"I don't know a single retailer about which I hear as many complaints as Toys "R' Us," said Barry Bryant, an analyst at Rodman & Renshaw who is the father of a 3-year-old son. "You never know where anything is, and there is no one to help. And to make matters worse, children are enticed in there as if they were walking through one long candy store. All of these things combine to create a uniquely unpleasant shopping experience for the parent."

The supermarket style of selling playthings has always been the Toys "R" Us trademark. Shoppers squeeze through charmless, colorless aisles and pick through rows of crayons, dollhouses, video games and action figures.

Merchandise is often piled so high it is impossible to reach, particularly while holding a wailing 3-year-old whose eyes are wildly fixed on Potato Head.

By offering a giant selection with very low prices and plenty of inventory, Toys "R" Us has been able to get away with this no-frills, service-short shopping experience. But parents have grown decreasingly tolerant of the lack of attention and chaotic arrangements at Toys "R" Us, especially when they can find some of the items for similar prices elsewhere.

Furthermore, a growing number of so-called educational toy stores has cropped up, offering soothing worlds of purple carpeting and TVs to plop children in front of while mom and dad shop. And nibbling away on the infant end of the business is Baby Superstores, a 63-store chain based in Duncan, S.C.

Toys "R" Us is fighting back. But can the giant that built its war chest through pre-emptive strikes do as well playing catch-up?

New vistas in shopping

Toys "R" Us has enjoyed a glittering history. The country's first "category killer" _ industry argot for giant warehouse-style stores that offer the most of one type of merchandise _ it toppled countless regional stores during the 1980s. It now easily dominates the market, with more than $9-billion in annual sales and 650 stores in the United States.

Even after the company's expansion slowed in the early '90s, the prospect of overseas growth kept investors' hopes alive. Several analysts remember conference calls in 1993 in which Toys "R" Us executives promised gains of as much as 50 percent in the company's international business.

But each foreign market threw its own curveball at Toys "R" Us: a sluggish economy in Germany, a Christmastime strike in France and strong local competition in Australia.

The company also made strategic missteps, such as choosing poor locations and failing to negotiate prices on merchandise and real estate.

With its fortunes sagging at home and abroad last year, the retailer desperately needed a hot Christmas. Instead, it got slammed when no new video or toy products arose to rival the phenomenal success the previous year of the Power Ranger action figures and the spinoffs from the Disney hit movie The Lion King. Worse, discount stores slashed prices, forcing everyone to sell toys at a loss.

After the disappointing holiday season, Toys "R" Us announced that it would take an after-tax restructuring charge of $270-million to close 22 stores in the United States and Europe and to consolidate distribution and administrative offices.

A disclosure in January that the Federal Trade Commission had targeted Toys "R" Us in an antitrust investigation only made matters worse. Wholesale clubs have complained the big retailer unfairly used its marketing power to discourage manufacturers from selling them popular toys. The FTC is expected to conclude the investigation within a month.

But Toys "R" Us has even larger themes to wrestle with. Like many retailers that enjoyed boom days a decade ago, it must find new ways to lure 1990s shoppers who have become accustomed to price wars and their spoils, and who are eager for fresh concepts and new merchandise.

To fend off interlopers and make its stores more inviting, Toys "R" Us is fighting back on several fronts.

It plans to roll out stores known as Concept 2000 in new locations and on existing sites. The 45,000-square-foot stores will have wider aisles and lower racks, so shoppers can see where things are and reach the merchandise. Colored tiles will replace the current gray floors, and fixtures will be festooned with colorful toyland icons. The first of 16 Concept 2000 stores will go up in New Jersey this year.

Then there's Babies "R" Us, a superstore devoted to the needs of the under-5 set and a direct challenge to Baby Superstores. There will be furniture, clothing, diapers and formula, complete room models and the all-important baby registry. Up to 10 of these stores will pop up this year, the first in New York state.

And this year, the company will put up two yet-to-be-named megastores: 90,000 square feet of toys and baby offerings that marry all the stores' concepts, including Kids "R" Us, under one roof. In the giant marts will be a food vendor, likely a McDonald's; a party room; a hair salon; and a photo studio, all leased to franchisers. There will be entertainment centers, breast-feeding rooms and a "castle" containing girls' fitting rooms next to traditional girls' toys, intended to encourage cross-shopping.

"This is a big change from what we have been doing," said Goldstein, standing next to models of the three stores that sit on a table in a conference room. "We think it is going to be great for us."

In addition, all Toys "R" Us are supposed to have better customer service and, to help reduce clutter, stores will offer 11,000 items instead of 15,000. Also, the company will throw more educational toys into the mix and make the current ones more visible.

Goldstein declined to say exactly how much all this will cost, but analysts estimate that the company's capital expenditure budget in the current fiscal year will run in the neighborhood of $650-million, well over the $586-million the company spent last year.

How much the company ultimately spends on the overhaul "is absolutely material," said Peter Kupferberg, a portfolio manager at Gofen & Glossberg in Chicago, whose firm has slowly unloaded much of its holdings in the stock. "If they can't stick to their numbers, that will only push margins further."

Many investors think Toys "R" Us has gone as far as it can in the United States, where it has captured about 23 percent of the $23-billion toy-and-video market.

In their view, it will need strong international growth to push earnings growth.

"They can put up these new stores, but they are pretty saturated," said Greg Jackson, a portfolio manager at Yacktman Asset Management in Chicago, which has invested about $1.3-million in Toys "R" Us. "The tremendous growth potential is international, particularly in Japan."

Overseas, he said, Toys "R" Us does not have a Kmart or Wal-Mart to compete with. This year the company will add 14 stores to the 37 now in Japan, putting it in a dominant position in that market.

Five years too late?

For investors, the questions remain: Why did Toys "R" Us wait so long to explore new opportunities, and can the same team that led them into this jam lead them out?

"We first started to think of making changes in late 1994," Goldstein said. "We saw a number of things happening: the expansion of Baby Superstores, of educational stores and the price aggressiveness of discount stores. We looked at all that and said, "To meet the challenge going forward, what should we do?' "

It seems odd it took the folks at corporate headquarters until the end of 1994 to turn their thoughts to these issues, given that the discount chains have been turning on the heat since the early 1990s, educational stores have been rolling out since the beginning of the decade, and the Baby Superstores concept was well under way by then, too.

"It is clear they should have done this five years ago," said analyst Bryant of Rodman & Renshaw.

Paring down the merchandise and rolling out new stores will take buying genius, and some wonder if Goldstein and president Robert C. Nakasone could use some help.

Nakasone comes from the supermarket industry, a background that many analysts say has worked for Toys "R" Us, with its emphasis on keeping a tight cost structure, but also against it by perpetuating a warehouse mentality in the display of goods. "They sell toys like cabbages," Bryant said.

So what's the investor to make of all this? Given the maturity of the domestic business, the growing number of competitors breathing down the company's neck and the uncertainty abroad, investors are resigned to one fact: "It's never going to be the growth stock it once was," said Marina Carlson, a portfolio manager at Strong Capital in Milwaukee, which holds about a million Toys "R" Us shares. Nonetheless, she thinks the stock has potential for growth.

"We'd be happy at 10 to 12 percent," she said.

Several new products _ such as new Star Wars figures, fresh Nintendo 64 videos and toys that spin off the films 101 Dalmatians, Toy Story and Space Jam _ should bolster Toys "R" Us this year. And the retailer is counting, perhaps incorrectly, on discounters to let up on the price wars and for shoppers to catch on quickly to the store's operational changes.

Goldstein does not seemed fazed by hard times. The company's headquarters in Paramus, N.J., is just a few miles from one of the busiest Toys "R" Us stores in the country. Goldstein's office walls are plastered with framed comic strips and drawings that celebrate his company and its world-renowned name.

"This one is from the time we were really big," he said almost reverently, pulling at the corner of an old news clip. "And we'll be there again."

But for now, the models of his dreams sit on a table in a silent conference room, alone.

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