Weak Entertainment Sales Hurt Toys ‘R’ Us Q2 Results

Toys “R” Us revenue for Q2 ended July 31 was flat with Q2 last year at $2.6 billion, it said, citing weak sales of entertainment products including videogame hardware and software. Same-store sales increased 0.6 percent in the U.S., but fell 3.2 percent in other regions as growth “in most categories were offset by a decline in videogames,” it said. There was “a slowdown in demand for videogame systems,” while videogame software sales were hurt by “fewer new software releases,” it said in a 10-Q filing at the SEC.

Despite the weakness in videogames, Toys “R” Us continued to offer aggressive promotions in the category this week. It’s giving away a free $10 gift card with the purchase of any one of 10 PS3, Wii and Xbox 360 titles cited in the retailer’s Sunday ad circular, or a free $50 gift card with the purchase of any two of them. The titles, priced $39.99-$59.99, included Ubisoft’s Just Dance for the Wii and Madden NFL 11 for the 360 from Electronic Arts. Toys “R” Us also advertised that it, like rivals Best Buy and GameStop (CED Sept 13 p11), would hold midnight launch events overnight for the Tuesday release of Microsoft’s new Xbox 360 game Halo: Reach. Customers who buy that game Tuesday will get a free $25 gift card, but only if they're Rewards “R” Us members, the circular said.

The company swung to a $14 million loss from the $27 million profit it posted for Q2 last year, due to a $51 million pre-tax benefit from a settlement with former e-commerce partner Amazon that was recognized in Q2 last year, a $16 million pre-tax lease accounting charge, and a $4 million reduction in tax benefits associated with discrete items in fiscal 2010 versus fiscal 2009, it said.

Gross margin as a percentage of sales improved to 37.4 percent from 37 percent in Q2 last year, “driven by improvements in sales mix away from lower margin products and by better levels of profitability on existing products,” it said.

The retailer said last week it will operate about 600 Toys “R” Us Express stores in malls and shopping centers in the U.S. during the coming holiday season, in addition to its 587 full-size Toys “R” Us stores in the country. The Express expansion “will double the number” of Toys “R” Us locations available for holiday shopping, it said. Rollout of the new pop-up stores will represent “an additional 2.4 million square feet of toy-selling space for the holiday season,” it said.

Toys “R” Us ended Q2 with 848 stores in the U.S., and 515 company-owned stores and 211 licensed stores in other markets, it said in the 10-Q. The U.S. total was flat with Aug. 1, 2009, but company-owned stores increased by five while licensed stores grew by 16 outside the U.S., it said.