Battle of Holiday Toys Rages On

With one week left until Christmas, customers can still find some of the season's hottest toys like Dora's Talking House and Bella Dancerella, a ballet kit, at Toys R Us Inc. (TOY). But it's a different story at rival Wal-Mart Stores Inc. (WMT) , whose inventory of many of the popular items has been depleted.

"We are in great stock with all the hot toys...This is when we shine," said Kathleen Waugh, a spokeswoman at the Wayne, N.J.-based retailer, which went back to its toy suppliers last month to reorder some of the surprise hits this season. They include Spin Master Ltd.'s Acquadoodle (search), a coloring mat with water-filled pens, and Mattel Inc.'s (MAT) Fisher-Price's Magic Hair Fairytale Dora (search), a 15-inch doll that comes with a butterfly wand.

With its future dependent on the outcome of 2004 holiday shopping, the nation's second-largest toy seller behind Wal-Mart has been determined not to let the Bentonville, Ark.-based discounter spoil its Christmas as it did last year, with earlier and heavier sales than in the past. In August, Toys R Us, whose profits plunged more than 60 percent last year, said it was considering selling its toy business; how it fares this holiday season will be a big factor in its decision.

To help reverse its fortunes, this holiday season, Toys R Us has stocked its shelves earlier than it did last year, has more exclusive merchandise, and has been beating the discounters on price at least in November. Over the last week, Toys R Us's prices have been slightly higher than the discounters, as it doesn't see the need to reduce prices on items that can no longer be found on its rivals' shelves, according to analysts.

However, while Toys R Us has an advantage on selection, it is too soon to tell whether it will bring home a healthy quarter. Last year, Toys R Us wound up with a disappointing holiday season even though it still had the hot toys at the end of the season and good customer service.

Sean McGowan, an analyst at Harris Nesbitt, an investment research firm, said that customer traffic will be the deciding factor in how Toys R Us fares this year, but he believes that this year "should be better." He noted that this season customers have gotten the message that Toys R Us is competitive on price and has the toys that shoppers want.

The retailer is getting replenishments of the most popular toys every day until Dec. 24, Waugh noted. Of course, to grab one of the big hits, consumers need to show up early at a Toys R Us store when the shipments are delivered — they get snapped up quickly, she said.

The only hot toy that customers won't be able to find at Toys R Us this weekend is Tyco Toys Inc.'s Terrain Twister (search), a radio controlled vehicle, Waugh said.

Still, the best weapon Toys R Us has is its ability as the industry's largest toy specialist to predict the hottest toys of the season and having them in stock in the final stretch.

So far, Toys R Us's prediction of the hot toys has been on target. Other popular toys that are selling out but that the toy seller still has in stock are Hasbro Inc.'s (HAS) Video Now Color (search), a portable video player, VTech Holdings Ltd.'s VTechV.Smile, an interactive learning system that plugs into the TV, and Fisher-Price's ESPN game station.

McGowan said that based on last week's spot check of 25 hot toys, Toys R Us was in stock on 68 percent of the items on his list. That compared with 56 percent for Target and 48 percent for Wal-Mart.

According to Mark Rowan, an analyst at Prudential Equity Group, LLC, Toys R Us was in stock on 82 percent of the items on his list of 28 hot toys, while Target was in stock on 72 percent. Wal-Mart had only 44 percent.

"I am finding huge holes" at Wal-Mart, McGowan said. He noted that the discounter's stock position is worse than a year ago.

Says Wal-Mart spokeswoman Suzanne Haney: "We still have a great selection of toys at every-day low prices."

Rowan noted in his research report that the Toys R Us stores his team recently visited showed "little signs of disarray." That compared to Wal-Mart stores, which had "entire shelves stripped bare of toys," he wrote.

Last month, Toys R Us was about 2 percent lower in price than Wal-Mart and 3 to 4 percent lower than at Target, based on McGowan's spot check of 75 toys.

But he added, "Every day matters" in the holiday's final stretch. In fact, Wal-Mart increased discounts last week, and customers could just settle for any toy at a lower price.

"Between now and next week is what it comes down to," McGowan added.

In trading Friday, Toys R Us shares slipped 13 cents, or 0.6 percent, to close at $20 on the New York Stock Exchange — near the high end of its 52-week trading range of $11.33 to $20.67.