Toys 'R' Us Announces Restructuring

PARAMUS, N.J., Jan 28, 2002 (BUSINESS WIRE) -- Toys "R" Us, Inc. today announced a series of steps designed to enhance its future cash flow and operating earnings.

The company plans to close 37 Kids "R" Us stores and 27 non-Mission Possible format Toys "R" Us stores, eliminate 1,900 store and headquarters positions, and consolidate its store support center facilities as part of its continuing strategic efforts to enhance profitability and concentrate its financial resources on those formats and stores that are most productive. These actions are expected to increase free cash flow in 2002 and beyond and to yield improvements to pre-tax earnings of approximately $25 million in 2002, and approximately $45 million annually beginning in 2003. Payroll savings associated with changes in support functions will account for $30 million of the $45 million.

In conjunction with these actions the company estimates it will incur restructuring and other charges totaling $237 million pre-tax. Of this, $79 million is associated with facilities consolidation, severance, and other actions designed to improve efficiency in its support functions. The costs associated with store closings are $73 million for Kids "R" Us and $85 million for Toys "R" Us, of which $27 million will be recorded in cost of goods sold. The company also intends to reverse $24 million of previously accrued charges that, after final evaluation, have been deemed no longer needed. Accordingly, based on these actions, the company intends to record $213 million of pre-tax ($126 million after-tax) restructuring and other charges in the fourth quarter of its fiscal year ending February 2, 2002.

Focusing on Most Productive Formats and Stores

John Eyler, Chairman and Chief Executive Officer, stated, "We have been very pleased with the performance of our remodeled Mission Possible store format in the Toys "R" Us division. Currently we have 433 stores in this format. These renovated stores maintained their positive sales gap over our unrenovated stores during the holiday selling season. We were pleased that during the five weeks of December, 12 of our top 20 metro markets, which includes New York/New Jersey and Boston, aggregated double-digit sales increases. The entire group of approximately 270 stores remodeled in 2001 achieved a 9% sales increase in the same period. As part of our Mission Possible program we have conducted a detailed assessment of every store in our U.S. toy store division," commented Mr. Eyler. "The 27 toy stores slated for closure are stores that were cash-flow positive, but were not meeting our return objectives. Approximately 10 of these stores are relocation candidates. In our judgment, the investment of significant capital to renovate these stores to the Mission Possible format would not be prudent. Rather, we will concentrate our investments on those stores judged most likely to produce superior returns."

"As we have discussed previously, our nine renovated Kids "R" Us prototype stores are delivering double-digit year over year sales growth. The consumer response to these stores has been overwhelmingly favorable. Our Toys "R" Us/Kids "R" Us combo stores are also performing very well. We are convinced that the new prototypes and combo stores represent the optimal strategic choices for the Kids "R" Us division. Consequently, we have made a decision to close 37 stores in the Kids "R" Us division. In almost all of these locations the nearest Toys "R" Us store will be converted to a combo store in tandem with the Kids "R" Us store closing.

Toys "R" Us currently operates 273 combo stores. By the end of 2002 the company plans to have approximately 375 combo stores. In 2002, 30 additional Kids "R" Us stores will be renovated to the new Kids "R" Us prototype. "The strong sales performance and improved profitability of these new formats underscored our decision to close those stores that are performing at levels below our financial objectives," Mr. Eyler continued. "The closing of these stores will improve our return on assets going forward."

Improving Efficiency of Corporate Functions

"As part of our ongoing effort to improve the effectiveness and efficiency of our corporation we will implement a shared services model across a variety of corporate support functions. Merchandising, store operations and marketing activities will continue to be performed by the separate divisions, however, the majority of administrative and financial functions will be shared. The consolidation of five separate facilities in New Jersey to our new store support facility in Wayne, New Jersey is an important step in the implementation of this shared services model," noted Mr. Eyler. The five New Jersey facilities include two locations in Montvale, and one facility each in Paramus, East Hanover, and Ft. Lee. The company's move to Wayne will begin in the summer of 2002 and is expected to be completed by summer 2003.

Occupancy costs in the new facility in Wayne are expected to be comparable to current occupancy costs. However, the facilities consolidation and implementation of the shared services model are expected to result in the annual payroll savings of $30 million referred to above.

"It will be far more efficient and productive for a $11 billion company like ours to be housed in one major facility rather than to be spread among multiple locations. We are confident that our move to a shared services model will improve both the quality and the speed of our business decision making. In addition, the shared services model also provides a framework more conducive to supporting growth of new business concepts," said Mr. Eyler.