As toy industry booms, Toys R Us struggles

Last year was a good one for the toy business: With the help of tiny collectibles such as Shopkins, slapstick games like Pie Face, and the merchandising juggernaut that is “Star Wars,” the industry saw a robust 5 percent increase in sales.

And yet, big-box behemoth Toys R Us struggled to cash in on your kids’ playtime.

The company reported this week that sales sank 1.4 percent last year at its Toys R Us and Babies R Us stores open more than a year. It posted a loss of $36 million — an improvement over last year’s $130 million loss, but nonetheless a sign that the retailer still is in turnaround mode.

Dave Brandon, the chief executive of Toys R Us, laid out the problems on Thursday during a conference call with investors. Some of it was fueled by big-picture cultural shifts: As video gaming increasingly moves to apps, the retailer’s video games and electronics business slowed down dramatically. In fact, Brandon said sales in this area were $200 million short of what they were in the previous year. That’s a meaningful hit for a company that saw $11.5 billion in sales overall in 2016.

But there were some tactical errors, too. During the holiday rush, the toy chain saw its rivals go on a discounting spree - moves Toys R Us suspects were aimed at dumping inventory that simply wasn’t selling that well.

Toys R Us, determined to protect its profit margin, decided not to get into the deals fray, which Brandon called “a race to the bottom.” But that likely cost the chain some sales, and left it with a fresh problem: It now has an excess of inventory that it has to figure out how to unload. (And given that Toys R Us gets 40 percent of its annual sales during the holiday quarter, you can see what a challenge this might be in the off-season.)

Toys R Us says it plans to try to reinvigorate its stores by making them into more of a hangout: It wants to hold more in-store events for the community, and it wants to present more “shop-inshop” experiences like the American Girl one it began presenting last year.

Other forces, too, could give Toys R Us a tailwind: Industry analysts say that Hollywood’s 2017 box office line-up could shape up to be a bonanza for toyland. There are some 20 movies being released this year that will come with major licensing programs, including “Spider-Man,” “Wonder Woman” and the “Beauty and the Beast” live action musical from Disney that has already rung up $1 billion in ticket sales. That’s an unusually large number, so it gives Toys R Us that many more hooks to lure shoppers back to its stores.

Brandon said Thursday that the retailer plans to try to capitalize on this schedule with sections at the front of stores that are dedicated to the latest movie gear. Executives hope that will allow them to swap out merchandise quickly without having to constantly reset other departments. Brandon said the first several months of the year will likely be “a reset quarter,” with improvement to come further down the line.

When Brandon took the top job at Toys R Us in 2015, chatter began that the privately-held retailer was likely headed toward an initial public offering. Brandon had steered Domino’s Pizza through an IPO during his turn there as chief executive, so speculation mounted that he was brought in to do the same at Toys R Us.

But given the disappointing performance at the Toys R Us brand and the company’s serious debt load, it’s now hard to imagine that happening any time soon.

And that’s before you consider the critical challenges facing Babies R Us, the other cornerstone of the company’s portfolio. Brandon said Thursday that a key priority for the year ahead is to reposition the baby stores, which have been hard hit by a decline in sales in so-called “consumable” goods such as diapers and formula.

The company’s annual report strongly hints that Amazon.com is stealing away those dollars, saying that competitors’ subscription models are creating serious competition for these kinds of goods.

Indeed, this is the kind of purchases that seems ripe for putting on autopilot via Amazon Prime’s subscribeand-save program. For one, it’s time-sensitive: When you need diapers, you need diapers. And it’s not very considered. You’re typically just replenishing what you already had, not trying something new.