Toys "R"n't Going Quietly

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Shares of toy retailer Toys "R" Us (NYSE: TOY) ticked up more than 4% in afternoon trading today on two bits of news that illustrate the recovering company's improving position in its marketplace: the sale of 124 no-longer-needed Kids "R" Us stores to Office Depot (NYSE: ODP) and the release of its fiscal Q4 (ended Jan. 31) and full-year financial results.

It's true that investors should probably be disappointed somewhat in the performance of the company's U.S. toy division, which saw same-store sales fall more than 5% in Q4 on disappointing video game sales. (Recent reports from toy leaderMattel (NYSE: MAT) might have pointed the way, though Hasbro (NYSE: HAS) did better.) Full-year operating income for the division fell significantly.

But there were bright spots. While profit margins came under pressure, Q4 and full-year revenues (before currency effects) did improve. The international division boosted operating income, as did Babies "R" Us. Operating losses at toysrus.com, meanwhile, were more than halved. The company is still fighting its way back from the deep doldrums of recent years -- and stuck in a difficult battle against discounters like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). With competitors like FAO Schwarz faring far worse, Toys "R" Us has at least regained credibility if not its old top dog position.

And Toys "R" Us investors now have a better-looking balance sheet and cash flow statement than they did a year ago. While long-term debt has ticked up slightly, the cash balance of about $2 billion is nearly double the year-ago figure. Inventory fell year over year, even if the impact of the Kids "R" Us and Imaginarium closings are ignored. Free cash flow was significantly improved as well. The sale of the "Kids" properties, expected to close over the next several months, can only help in the long-term -- though in the short-term associated charges will cancel out the take from Office Depot.

How this move works out for Office Depot, meanwhile, should be interesting to watch. (We took a look at the company and its competitive position relative to the likes of Staples (NYSE: SPLS) and OfficeMax acquirer Boise Cascade (NYSE: BCC) last month.) The company is paying Toys "R" Us $197 million in cash, plus lease payments and other costs, for 124 stores and leased properties. Of those, 50 to 60 are slated for conversion to Office Depot superstores.

Presumably the convenience of having Toys "R" Us vet and develop the properties, as well as the specific locations themselves, are worth the premium it would appear Office Depot will pay for them: In its latest 10-K, the company said its average cash investment for each new domestic superstore is $1.2 million after pre-opening expenses. But that's a topic for another story.

Pick the side of this story that interests you and share your thoughts on our Toys "R" Us or Office Depot discussion boards.

Dave Marino-Nachison doesn't own any of the companies in this story. He can be reached via email.