Highly Promotional Environment A Drag on Toys R Us Q4 Sales

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Toys R Us, hampered by sluggish sales tied to “continued weakness” in entertainment-related products, posted a 3.9% decline in revenue in Q4 ended Jan. 28 to $4.6 billion on a 3% drop in same-store sales. Despite the decline in Q4 sales, net income for the quarter rose to $344 million from $276 million.

A sharp drop in December sales, driven by a “slowdown” in customer traffic at its stores and an abrupt change in “consumer behavior,” left Toy R Us saddled with $2.47 billion in inventory, up from $2.27 billion a year earlier. The chain worked through some inventory in Q1, but is struggling against sharp discounting at other retailers, CEO Dave Brandon told analysts. As a result of the increased inventory, the company has booked a $30 million reserve, the company said.

“It was unprecedented what unfolded” during the holiday season, said Brandon in noting that sales remained strong through Black Friday promotions in late November. Once it was clear that toy sales were slowing, while Toys R Us maintained its margins, other retailers moved to “dump inventory” at discounted prices before the end of the year, Brandon said.

“We are going to work through this inventory in next several months in a responsible way,” Brandon said.

The declines were clear with brands that are typically top-sellers at Toys R Us. The chain’s sales for the year of Lego products decreased by $60 million, while sales of Star Wars-related items was down by $50 million, Brandon said. “We clearly struggled” with Lego products and “now our task is to get that turned around.” Lego products are “high margin” items for Toys R Us, he said. In Q4, entertainment product-related sales declined 2.3%. Overall, U.S. revenue fell 2.3%, while international sales dropped 4.2%. Entertainment revenue accounted for 10.2% of Q4 sales, down from 12.5% a year earlier.

Toys R Us will seek to reverse disappointing Q4 sales by leaning heavily on the slate of 26 films on tap for the balance this year. Theatrical releases such as Cars 3, Despicable Me 3 and Star Wars: The Last Jedi, “open the door for a significant opportunity” to sell licensed products, Brandon said. To take advantage, Toys R Us installed “movie shops” at the front of its stores that will merchandise film-related products on a rotating basis, Brandon said.

The retailer also is launching a revamped web site on April 27, company officials said. Toys R Us posted an 11% increase in ecommerce revenue in the fiscal year ended Jan. 28 and sees “big opportunities to further grow” the business.

The chain expects to reduce expenses by $50 million this year, due partly to cutting 250 jobs in February.

Contact:

Toys R Us, Richard Barry, Chief Merchandising Officer,  973-617-5888, Richard.barry@toysrus.com