Dive Brief:

• Toys R Us on Tuesday said its first quarter consolidated net sales were $2.21 billion, a decrease of $113 million compared to the prior year period. Excluding a $24 million negative impact from foreign currency translation, net sales declined by $89 million, largely attributable to declines in the baby category, according to a company press release.

• Consolidated same store sales in the quarter fell by 4.1%, driven by a 6.2% decline in the retailer’s U.S. business. International fell 0.6%, resulting from weaker sales in Europe and partially offset by growth in Asia Pacific, the company said. Adjusted earnings before interest, tax, depreciation and amortization for the quarter were $44 million, down from $79 million in the prior-year period.

• Operating losses in the quarter were $54 million, widening by $47 million over the same period last year. Domestic segment operating earnings declined by $38 million, primarily due to reduced gross margin dollars, while international operating earnings fell by $10 million, due to increased operating expenses. Corporate overhead remained relatively flat compared to the prior year period, the company said. The results produced a net loss of $164 million, compared to $126 million in the prior-year period.

Dive Insight:

The troubles visited on private equity-owned Toys R Us over the holidays continued in the first quarter, with particular weakness in its baby and toys business, Chairman and CEO Dave Brandon lamented in his statement Tuesday. Aggressive price competition contributed to the declines, he added. The retailer is working on boosting efforts to connect with customers and wrest back market share.

“[W]e have several key initiatives which we expect to drive growth during the second half of the year," he said.  "Among the more noteworthy projects are our new web store and baby registry, which will be implemented this summer; new capabilities in CRM; an enhanced loyalty program and additional shop-in-shops to drive traffic. We expect this work will have a meaningful difference on the customer experience in both our web store and brick-and-mortar locations.”

Last week Moody’s pegged the struggling retailer as a “fallen angel,” whose initial downgrade in 2004 was a reflection of the fact that the retailer, as Moody’s puts it, was no longer in control of its competitive destiny while Walmart and Target were in the driver’s seat in the toy segment. During the holiday season in particular, those retailers forced Toys R Us to compete on price, which hurt margins. 

Still, the retailer's rating has held firm, thanks to its ongoing strengths as a destination for toys and other children's needs, and not just at the holidays. Throughout “myriad refinancings" (including one in 2016 that Moody’s deemed a distressed exchange), and multiple CEO turnovers, Toys R Us managed to maintain market share, relevance and general solid liquidity, according to Moody’s report.

“This has been one of the key factors that has kept the rating from dropping… even when factoring in its serial debt maturities and a quantitative profile” that has sometimes seemed to warrant a lower grade, according to Moody’s. “Throughout, Toys has held onto its position as the year-round destination toy retailer. It has... held up fairly well against the cutthroat holiday promotional environment that is spurred by Walmart, Amazon and Target, all of which deeply discount toys to drive web and store traffic. It also has strong vendor relationships with Hasbro and Mattel, which we believe have a vested interest in supporting Toys with exclusive product and in some cases favorable vendor terms. We cannot envision either of these key vendors benefiting from a toy retail segment led by three mammoth retailers that view the toy category as a seasonal traffic driver.”