Toys R Us May Sell Global Toy Business, Spin Off Baby Unit

Children's toy and apparel retailer Toys "R" Us Inc. (TOY) said Wednesday that its board has decided to evaluate options to sell the company's global toy business as well as possibly spin off its Babies "R" Us (search) operations by the first half of fiscal 2005.

Toys "R" Us will operate the two businesses as separate entities from the domestic Toys "R" Us operation, pending their sale and/or spinoff, and the company also plans to launch a substantial restructuring of its global toy business to cut capital and operating costs and strengthen that business's cash flow potential.

Toys "R" Us said its global toy business and Babies "R" Us unit operate in distinct markets, and are at different phases in their growth cycle, and the company expects that this move will allow Babies "R" Us to continue its healthy growth.

As part of the planned restructuring, the company will overhaul its corporate headquarter operations in Wayne, N.J. Toys "R" Us recorded about $14 million in severance-related charges associated with this restructuring in the second quarter, and expects that it will post additional charges in the future.

The company will cut operating expenses at its corporate headquarters and U.S. toy business by more than $125 million by fiscal 2005, and plans to reduce capital spending in 2005 for the global toy business by roughly $150 million. Toys "R" Us will take approximately $150 million in markdowns in the second quarter, primarily to liquidate selected U.S. toy store inventory, accelerate inventory turnover and generate additional cash.

In connection with the restructuring, the company said that John Eyler (search) will continue in his role as chairman and CEO of Toys "R" Us Inc., and Ray Arthur will continue as chief financial officer. Richard Markee, vice chairman, was named president of Babies "R" Us and will become CEO and president of Babies "R" Us upon separation. Jon Kimmins, treasurer of Toys "R" Us Inc., will join Babies "R" Us as chief financial officer upon separation. John Barbour, who is currently president of Toys "R" Us International, will replace Rick Markee in his current position as president of the U.S. toy stores.

Since the company's stores are now focused on preparing for the upcoming holiday season, and all domestic Toys "R" Us stores are cash flow positive at the store level, Toys "R" Us said it wouldn't be appropriate to make a decision now about closing any stores between now and end of the 2004 holiday season.

The company has postponed its second-quarter earnings release to Aug. 23 from Aug. 16. Credit Suisse First Boston LLC is serving as the company's financial advisor in connection with its strategic review.

Shares of Toys "R" Us were down 72 cents, or 4.4 percent, at $15.70 on the New York Stock Exchange (search).