TOY-very positive piece in the just released FORBES:
Toy story
Toys "R" Us, once the king of toy retailing, lost its preeminence to surly service, grungy stores and inattentive management. In the Jan. 30, 1999 fiscal year the Paramus, N.J.-based chain hauled in $11 billion, but Wal-Mart sold more toys than that. Over the past five years, as the market more than doubled, Toys' shares (NYSE: TOY) have fallen by 50%. Now William Miller, manager of $12 billion Legg Mason Value Trust, thinks they are cheap.
This much is clear: Toys, with a market capitalization of $5.9 billion, would be nearly as cheap a company to acquire as Etoys, a moneylosing Web retailer that sports a market cap of $4.9 billion.
Miller is betting on Chief Executive Robert Nakasone, who took Toys' reins in February 1998 and vows to close down any of the 1,486 stores that aren't making money. He is going to redesign 500 of the survivors over the next two years. There will be no more boxes piled too high for customers to reach, and less inventory will mean more space for service and selling. Suppliers will simply have to make more timely deliveries. A wider range of electronic games will be offered and there will also be a clearance section. Nakasone has already cut inventory by $500 million in the last 12 months, to $1.9 billion.
Nakasone boosted operating income (earnings before depreciation, amortization, interest, taxes and changes in working capital) to $964 million for the last fiscal year, from $509 million the year before. He's also been buying back shares and has already bought in 14% of the outstanding stock.
Star Wars merchandise and the new Sony PlayStation will increase store traffic. Toys "R" Us is coming on strong on the Web, too, with a Silicon Valley-based subsidiary bankrolled in part by Benchmark Capital, which funded Ebay. Another subsidiary, Babies "R" Us, grew 20% last year.
Miller expects Toys "R" Us to earn at least $1.65 per share in 1999. At a recent $23.50, it's trading at 14 times that figure, half the market's forward multiple.
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