Toys R Us May Sell Toy Business!

NEW YORK (Reuters) - Toys R Us Inc., a toy retailer slammed by intense competition from discounters such as Wal-Mart, may sell its toy business and focus on its fast-growing Babies R Us unit, the company said on Wednesday.

Toys R Us, whose shares fell 6 percent on the news but later recovered, said it intends to separate ownership of its two businesses and is looking at various steps to accomplish this, including a spin-off of Babies R Us.

By separating the businesses, Babies R Us would be better able to thrive and build on its core market of supplying bedding, furniture and clothes to expectant and new parents, it said.

The toy business, which targets a much different customer, will face a dramatic cut in operating expenses and capital in an effort to boost its cash flow, the retailer added.

"We are not surprised by the news that Toys R Us management is preparing for a rougher ride," said Richard Hastings, an analyst with Bernard Sands. "The mass market retail toy business remains very volatile and exposed to significant risks."

He said the most important element was the spending cuts in the toy business.

Toys R Us Chairman John Eyler said in a statement, "The series of steps we are announcing today reflect the fact that our global toy business and our Babies R Us business operate in distinct markets and are at fundamentally different phases in their growth cycle."

"It's going to be really good for the company," said Jim Silver, a toy industry expert and publisher of Toy Book and other trade magazines.

Toys R Us has 683 toy stores in the United States and 579 abroad. Babies R Us, the largest baby product specialty store chain in the world, has 200 U.S. stores.

NEW BABIES MANAGEMENT

Richard Markee, who was president of U.S. toy stores, will become chief executive and president of Babies R Us upon separation of the two businesses.

Silver said, "There has been concern about Toys R Us being bad spenders, but under the new leadership it'll be a lean, tightly run operation."

Toys R Us, based in Wayne, New Jersey, also said it had postponed the release of its second-quarter earnings by one week, to Aug. 23.

The company's toy operations have been grappling with competition from big discounters like Wal-Mart Stores Inc. and Target Corp. Price wars among toy retailers have led to bankruptcy for FAO Inc., parent of the upscale FAO Schwarz toy stores, and mall-based toy retailer KB Toys.

Toys R Us plans to take about $150 million in markdowns in the second quarter, primarily to liquidate selected U.S. toy store inventory. It said it would not make a decision to close any of its stores between now and the conclusion of the 2004 holiday season.

Toys R Us shares were down 35 cents to $16.07 near midday the New York Stock Exchange after falling as low as $15.43 earlier in the session.