A turnaround for Toys 'R' Us

Long Christmas trees twinkled in windows, the chief of Toys "R" Us threw his company's weight behind an odd bet.

It was early summer, and Gerald Storch had a fake hamster on his desk. His buyers, the executives who study and order merchandise, were predicting it would be a holiday hit. Storch laughed as the rodent scurried around and plopped off a table, then he turned serious: "How big can we make it?"

So big, it turned out, that mothers are now lying in wait in Toys "R" Us parking lots all over the nation, desperately hoping to score toy hamsters for Christmas.

Storch's big order for Zhu Zhu Pets was the latest achievement for a man who, in the midst of a recession, has begun to pull off a retailing turnaround. Only five years ago, Toys "R" Us was in grave trouble. Sales had shrunk and the chain had fallen under the shadow of Wal-Mart, the behemoth discounter. Retailing professionals said the beleaguered toy industry was losing ground to flashy electronic gadgets.

When Toys "R" Us was sold, in 2005, for $6.6 billion to two private equity firms and a real estate developer, analysts thought it was only a matter of time before the chain would be carved up and sold.

They were wrong. The new owners hired the bespectacled Storch, a longtime Target executive, to help Toys "R" Us get its sparkle back.

In the last year, Storch has taken bold steps. He snapped up nearly every well-known specialty toy chain and website, including FAO Schwarz and KB Toys. As mall retailers went out of business, Storch opened more than 80 temporary holiday toy shops in their vacant storefronts. And he is rolling out supercenters, with Toys "R" Us and Babies "R" Us stores under one roof.

"While it would be easy to get into a very defensive hunker-down mode during these economic times," Storch said, "history has shown that the future rewards companies which are aggressive during economic downturns."

Prospects are looking up

Toys "R" Us has not gone unscathed in this economy; the chain said in its most recent reporting period that sales declined from last year. Even so, Storch has managed to make it the last big specialty toy retailer left in the nation, and one whose prospects are looking up.

Where consumers used to shop at KB Toys in malls throughout the country, they are now shopping at Toys "R" Us holiday boutiques. When tourists buy wide-eyed dolls at FAO Schwarz, their dollars go into the coffers of Toys "R" Us. Even a search for the word "toys" on the Internet inevitably leads to a website owned by Toys "R" Us: Toys.com, eToys.com, BabyUniverse.com, FAO.com or ePregnancy.com.

Wal-Mart overtook Toys "R" Us as the nation's largest toy seller more than a decade ago. Storch's fundamental strategy is not to try to compete by matching Wal-Mart's prices. Instead he is trying to outfox Wal-Mart by focusing on service and especially on selection, perceiving the next hot toy trend and locking in big orders before his competitors even see it coming.

"Now our competitors are left competing purely by making price claims," Storch said, adding that he would not reinforce "a rush to the cheap." He pointed out that his competitors could not cut prices on toys they do not have.

An abrupt exit from Target

Storch, 53, joined Toys "R" Us after 12 years at Target, where he rose to vice chairman and was widely considered to be one of two contenders for the top job. But in 2005 he abruptly left the company, never giving a reason. Retailing professionals said they think it became clear inside Target that Storch, known as more of an operations man than someone with a flair for merchandising, was not going to ascend to chief executive.

Four months after leaving Target, Storch was named chairman and chief executive of Toys "R" Us, where from his early days he held the chain accountable for its poor results and invoked the mantra, "We are not victims."

When buyers at Toys "R" Us were first introduced to fake hamsters, known as Zhu Zhu Pets, at the Hong Kong Toys and Games Fair, "we saw the potential," said Lisa Harnisch, a vice president and divisional merchandise manager for Toys "R" Us.

By May, Toys "R" Us had partnered with Cepia, the small company that created the hamsters, to do a test run in a few stores in Arizona. Sales were off the charts. "At that point we knew this was going to be really big," Harnisch said.

Storch boasts "vastly more Zhu Zhu inventory than anyone else," and other people in the toy trade confirm that claim. "It will sell out, regardless," he said. "But if you will find it anywhere, you will find it at Toys "R" Us."