Toys "R" Us (NYSE: TOY) is taking baby steps -- that is, steps to be all about babies. Today, the toy retailer revealed restructuring plans, with the possibility of selling its global toy business and spinning off its Babies "R" Us unit. It's a perfect tribute to the competitive forces exemplified by Wal-Mart (NYSE: WMT), but is it such bad news?
Over the course of recent months, retailers like FAO Schwarz and KB Toys have foundered, pressured not only by Wal-Mart but also by Target (NYSE: TGT) and Motley Fool Stock Advisor pick Costco (Nasdaq: COST). Toys "R" Us has also suffered, though there were signs that it might be able to capitalize on the misfortune of other floundering toy retailers.
In the long run, why throw good money after bad? If competitive forces are indeed too much, then why not sell out of the toy business and focus on the business segment that is excelling. (It seems to me that for expectant parents -- and more important, their families and friends who are shopping for them -- the Babies "R" Us registry is, quite simply, the standard in a super-lucrative industry.)
It's not the first company to change directions in this manner, focusing purely on the segment of the business that holds the most promise for growth. Other similar split-ups include Westinghouse's switch from an industrial company to a broadcaster, and Nokia's (NYSE: NOK) evolution from a rubber maker to a telecom power.
In its press release, Toys "R" Us said that for its toy unit, it will "cut expenses, pursue operating efficiencies, and reduce capital expenditures" to create "a radically different global toy business with a powerful ability to generate cash." This includes $150 million in markdowns in the second quarter as it liquidates its U.S. toy store inventory to enhance store productivity, supply chain efficiency, and to accelerate inventory turnover and generate additional cash.
Meanwhile, when you think about its retail presence, Toys "R" Us owns some attractive real estate (much like Kmart (Nasdaq: KMRT), which has recently been attempting to sell off some of its stores to Home Depot (NYSE: HD) and Sears, Roebuck (NYSE: S)).
Although investors bid down shares of Toys "R" Us, maybe the picture isn't as bleak as it seems, especially considering the focus on its strong and growing niche play, Babies "R" Us. In a new twist on an old adage, don't throw the baby out with the bathwater.
Parents and expecting parents have lots of stuff on the wish list at Babies "R" Us or otherwise. What kinds of stuff do you need, if you're expecting? Now that you've had the baby, will you ever sleep again? Talk to Foolish parental units on the Parents and Expecting Parents discussion board.
Alyce Lomax does not own shares of any of the companies mentioned, though she has been a frequent shopper at Babies "R" Us for baby gifts for friends.
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