Toys ‘R’ Us – a leading global retailer of dedicated toys and baby products, has reported a fiscal 2011 first quarter loss of $67 million compared to a loss of $55 million in the year-earlier quarter. The increase in quarterly loss was primarily driven by higher operating expenses and lower same-store sales, partially offset by an increase in net sales driven by positive contributions from new locations and a foreign-currency benefit.
The business of Toys ‘R’ Us is highly seasonal with fourth quarter accounting for over 80% of the fiscal net income, primarily due to strong holiday sales. For the quarter ended April 30, 2011, Toys ‘R’ Us reported net sales of $2.64 billion – an increase of 1.1% on a year-over-year basis. However, same-store sales for the reported quarter dipped 2.1% in the U.S. and 1.9% internationally.
By product categories, the learning and core toy division generated strong performance with sales rising 7.9% and 5.4%, respectively, while that of the entertainment division that includes videogame hardware and software slid 6.6%. Gross margin for the reported quarter increased marginally to 37.1% from 36.2% in the year-ago period.
In order to thwart competition and lure shoppers away from No. 1 toy retailer Wal-Mart Stores Inc. (WMT), Toys ‘R’ Us has made a series of strategic investments, including the expansion of its e-commerce business and store conversions to integrate both toy and juvenile products. This in turn has resulted in an increase in expenses due to higher spending related to ongoing store operations, investments in new locations and remodeling costs.
Toys ‘R’ Us is also currently mulling a public offering. The strategic move is the latest ploy by the string of private equity firms that own Toys ‘R’ Us to capitalize on their investments by selling their holdings. In 2005, Toys ‘R’ Us was acquired by Kohlberg Kravis Roberts & Co. (KKR), Bain Capital and Vornado Realty Trust (VNO) for $6.6 billion.
New York-based Vornado Realty is one of the largest real estate investment trusts (REIT) in the U.S., engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us. Vornado Realty currently owns about 32.7% of Toys ‘R’ Us.
Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The company also has a healthy balance sheet and adequate liquidity.
We maintain our long-term ‘Neutral’ rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.
KKR & CO LP (KKR): Free Stock Analysis Report
VORNADO RLTY TR (VNO): Free Stock Analysis Report
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