Toys ‘R’ Us

Total Turmoil in Toyland

Let’s see, what hasn’t happened in the last four weeks? Toy shows always bring out plenty of news, rumor and innuendo but this time it’s a little hard to keep up.

We opened with the bankruptcy announcements by Applause, Fun 4 All, Hedstrom, and Huffy and from there moved on to poor earnings announcements at Mattel, Hasbro and Leapfrog. Then there was Hit Entertainment’s dismissal of CEO and chief architect Rob Lawes. Add to this KB Toys announcement that it will be shutting close to 200 stores after Christmas and the discovery that TRU’s toy division is being actively shopped (although TRU isn’t saying much, maybe they’ve gotten just a little bit smarter). Also, the Toy Building has been put up for sale – something they forgot to mention at their cocktail party.

Then there are the lawsuits. The World Wrestling suit against Jakks Pacific, Stanley Shenker, Bell Licensing et al looks particularly nasty. It will be interesting to see how that plays out. Allegations are easy to make especially when there are lots of big egos involved. They can be much more difficult to prove even if true. I certainly have no way of knowing what if anything happened, but it will be interesting to watch.

Then there is the lawsuit that Mattel has filed against Ron Brawer because he didn’t care to work for them any more and found himself another job. This appears to be a nuisance suit as apparently Mr. Brawer had no non-compete or confidentiality agreement with Mattel. Never in my life did I think I’d find myself on the same side of an argument as Isaac Larian, but Mattel is really screwing up here.

If a hypothetical company, let’s call it “Stalag El Segundo” were hypothetically to start having current and former employees followed by private detectives, were to submit their current employees to grillings by teams of attorneys, were to install security cameras in many of its offices, were to begin heavily monitoring employee phone bills, e-mail and computer activity; if a hypothetical company were hypothetically to do all that, my twenty three years experience as an executive recruiter tells me that they are likely to get results that they did not intend. That companies employees might be cowed for a month or two but in such a stifling environment would quickly decide to head for the exits. It’s the sort of thing that brings joy to a headhunter’s heart.

After rehashing all that, the following may seem counterintuitive but the October Toy Show was pretty upbeat. While some people complained about the lack of hall traffic, that’s not the type of show it is. Of the approximately thirty toy company presidents that I talked to, most felt that the show was very productive. Also surprising is that toy industry hiring continues at a torrid pace.

Too many things are happening too fast to have a fully developed thirty minute answer as to why this is so (sorry, sitcom watchers). It may be that we are finally at a tipping point. Much has been said in the last couple of years in this space and everywhere else about how Walmart’s drive to use toys as loss leaders has structurally changed the business. We may now be at the point where the market is choosing winners and losers. In the current environment it is very hard to be a winner, it is also very good to be a winner. Even more difficult than being a winner is to be average and still survive. In other words, it has started to get mean out there. Companies that are developing new and flexible strategies and successfully executing them and adapting to a rapidly changing reality are moving ahead. Companies that are unable to see the changes, plan for the changes or execute on their plans have begun to and will continue to fall by the wayside.

I know the message is not particularly cheery, but it’s definitely time to toughen up.

All the best,
Tom Keoughan

By | November 2nd, 2004|ToyJobs Blog|Comments Off on Total Turmoil in Toyland

Continued Turmoil in TRUland

Within just two weeks of laying their bombshell on the toy industry, Toys ‘R’ Us was staggering around like a drunken man. The Dude was making phone calls to toy executives and back pedaling furiously. At the August 24th meeting, he told analysts that talk of selling the toy division may be premature. This is a little confusing in that it was the Dude himself who started that talk. Clarification was not forthcoming because TRU cancelled its regular Q&A session with analysts. No one that I’ve talked to believes a word of this retraction and it is generally attributed to attempt at damage control by a management that is so inept, that they can’t even figure out how to time a major announcement.

There has been talk that the Dude is planning a master stroke of adding fast food and arcade games to their stores. This sounds like one of his already failed “we’re not a store, we’re an experience” strategies. To be sure this may attract ‘tweens and younger teens, but with kids “growing up earlier” this is not a crowd that is likely to be buying a lot of Barbies, Leapfrogs, or stuffed animals. It almost appears as if heavy drinking has been substituted for sound business strategy.

In addition to TRU’s downward spiral into madness, the toy industry has been hampered by both a shortage of chips and high oil prices which is fueling increased electricity costs in China, transportation costs everywhere and an over 30% rise in resin prices. Walmart will not eat these cost increases (at least not this year) thus sparking increased margin erosion.

Also looming is TRU’s announced 150 million in writedowns. For toy manufacturers total sales will most likely be better than last year, but margins could very easily be worse.

In terms of toy industry hiring, I am happy to announce that my predictions of last month were dead wrong. Coming out of the seasonal summer slowdown hiring has accelerated and is now quite robust. There is not a lot of wholesale hiring going on but everyone seems to need an extra pair of hands or two. The coming October toy fair should be interesting to say the least. I look forward to seeing you all there.

All the best,

Tom Keoughan

By | September 20th, 2004|ToyJobs Blog|Comments Off on Continued Turmoil in TRUland

TRU Board Wakes Up…Finally

The Toys ‘R’ Us board finally awoke from a deep five year slumber when one of their members suddenly came to and was heard to shout: “Dude, Where’s My Company?”  The Dude had spent the last year building a mega million dollar headquarters, buying pricey Stargates and awarding himself 5 million dollar bonuses while Walmart ate all of his lunch and a large portion of his dinner too.  This is the second toy retailing institution that…Well, you know.  None of this was able to rouse the board and they seem still to be a bit drowsy because The Dude is still around although we suspect that he’s no longer really at the helm. (Step up Mr. G.)

At this time, it’s difficult to say exactly how this will affect toy manufacturers, except that it won’t be good, because TRU has not provided very complete information and isn’t answering any questions.  Looking back over the last five years perhaps we shouldn’t assume that they know what they’re going to do at all.

It appears that the board, The Dude and several senior executives are going to jump ship and hop into the much smaller but much healthier lifeboat of Babies ‘R’ Us.  How the separation will be achieved is pretty much open to speculation.  Speculation at the expense of others can be a fun and stimulating pastime and so we’ll give it a go.

First, it seems fairly certain that TRU will shutter a significant number of unprofitable stores (100+) and either sell off the real estate or sell off long term low rent leases similar to what K-Mart recently did.  This would be a smart move and could raise significant capital.  The question is what will they do with the cash?  They could return it to shareholders – not very likely.  Since it is toy stores being sold they could give it to the remaining toy division to patch up and rebuild.  Perhaps, but I suspect that the toy division will mainly end up being recapitalized by selling off its international unit.  It could go to Babies ‘R’ Us along with the board, The Dude and the rest of the ship jumpers…hmm.  Babies ‘R’ Us could use the loot to fuel a long term growth strategy or it’s also likely that they may need a brand spanking new mega million dollar headquarters and perhaps their own Stargate or two.  As a registered cynic, I suspect that is where most of the money will go with just enough being given to the toy division to keep up appearances and satisfy the board’s liability insurance company.

The toy business could be sold to a strategic partner but I don’t think that they are exactly lining up and any strategic buyer would have to be so incredibly stupid that there would be very little chance that they could ever fix the damn thing.  It could be spun off to shareholders.  “Dear Shareholders, please accept this falling knife as a symbol of the esteem in which we hold you.”

What would seem to make the most sense would be for the toy business to be either taken private or sold to a private equity group. Without having to waste time, money and energy on the wacky growth strategies needed to please the equity investors who somehow never figured out that this was a mature business; a slimmed down, better operated toy division could be a real cash cow.  In these uncertain times there is nothing wrong with cash.  I like cash.  Please send ME your cash.

A possible silver lining in all of this is that the toy division will be run by John Barbour who recently ran Toys ‘R’ Us International.  John is a smart, honest, hardworking guy who very importantly has spent most of his career on the manufacturers side.  Hopefully, this might mean he will be more willing to “partner” with his vendors and less likely to pull the type of crap that Toys ‘R’ Us has become all too well known for over the last ten years.  This idea should be tempered though with the knowledge that Mr. Barbour will be performing emergency surgery and has an extremely tough job ahead of him (note: Mr. Markee opted to hop into the lifeboat.)

In the very short term our eyes are riveted on the words: “150 million dollars in writedowns.”  Toys ‘R’ Us is genetically incapable of swallowing this type of a thing and vendors had better watch out.  The company’s long term motto for vendors – “When we suck, you pay!” will certainly be in force.

How does all this affect toy industry hiring?  Hiring has continued to be robust through July.  In fact, at Toyjobs, July was our best single month in twenty three years of practice.  Most of this can be attributed to closing out searches which began in May and June.  New search starts in July slowed due to the usual seasonal fluctuations and the same appears to be happening in early August.

For the year, toy industry hiring has been way up with the exception of Mattel which seems to be desperately trying to manage earnings through layoffs rather than growth.  The economy has turned the corner, although as I’ve said before, the toy industry uptick has been much more muted.  This is likely because the industry’s problems are not caused by consumer demand but by retailers.  These troubles will continue until someone devises a new method if distribution which lessens dependence on Walmart, Toys ‘R’ Us and the like.  So far, I’m not smart enough to figure that out, but hopefully someone will be.  In the meantime, toy companies have been running so lean over the last couple of years, that even a modest upturn have left manufacturers scrambling to get the work done and every company seems to need a couple of extra pairs of hands.

Up until last week’s news, I was predicting that the summer recruiting slowdown would end in late August as it usually does and that hiring would be strong through the end of the year.  The TRU news throws a new uncertainty into the mix and I suspect that until there is more explicit information that toy companies will temporarily act like deer staring into headlights until they can figure out how all this affects them.  Ultimately, Walmart and Target will come a-knocking, looking for samples – faster, earlier, cheaper and with lots of changes and toy companies will be forced to hire people to get the job done.

While people are currently enjoying a slower, more relaxing summer pace; the combination of last weeks news and the fact that October Toy Fair is not as far away as it looks has prompted us to include the following article as a public service.  It provides some techniques purported to help us each to reduce stress in the workplace (toy business? stressful?).

Will they work?  I don’t know yet but I’m going to start practicing now.  By the time the September ramp up rolls around it will be way too late.

All the best,
Tom Keoughan

By | August 17th, 2004|ToyJobs Blog|Comments Off on TRU Board Wakes Up…Finally

Help Wanted: Major Toy Retailer Seeks Successful Strategy

The feedback that we’re getting on the mood in Hong Kong is that manufacturers are not so much cautiously optimistic as much relieved that 2003 is finally over. There seems to be an element of “It’s got to be better than the last three years.” Barring any unforeseen geopolitical normally be true but (and it’s a big but) Wal-Mart clearly has its eyes firmly fixed on competing toy retailers and is slowly squeezing the life out of them. Once that is accomplished it’s anybody’s guess as to who they’ll squeeze next.

Most retailers, excluding toy retailers, had a very strong holiday sales season with the flawed measure of comparable store sales at most of them up over 4%. Total sales for most were up well into the double digits. For toy retailers, on the other hand, the season was disastrous. FAO finally ground to a halt and will likely poke its head up with new ownership and an extremely scaled back presence. The KB situation smells a bit like a company that didn’t really have to declare Chapter 11 but is using bankruptcy laws as part of a corporate strategy to stiff their vendors and weasel out of leases. Total sales were down at Kmart, but that’s easily attributable to having fewer stores. More importantly, they were profitable so at least it appears that they are being managed properly.

The linchpin is Toys ‘R’ Us. While the reduced number of stores at FAO and KB should clearly benefit TRU, they have Wal-Mart camped at their front door like a big cat, well fed but still hungry for more. TRU had lousy sales numbers, weakening margins and their debt was cut to junk status by Standard and Poors. I would look for them to be very demanding on the markdown money department. “We’ve had a lousy year and you’re going to pay for it.” Of greater long term concern is that thus far, corporate strategy seems to be exactly wrong with little sign of any new clear thinking. Will management be able to come up with a new strategy that can succeed against big W? Or will the focus continue to be on new corporate headquarters and sculptural boondoggles. Is it better to have no strategy at all or to have a bad one and be driving hard down that wrong road? These philosophical questions will certainly be much discussed over late night cocktails in cold February New York. I can almost hear the fiddling even as I whiff the strong smell of smoke.

See you in New York,
Tom Keoughan

By | January 19th, 2004|ToyJobs Blog|Comments Off on Help Wanted: Major Toy Retailer Seeks Successful Strategy