Toys 'R' Us gains new spirit

As Gerald Storch bounded through the new Toys 'R' Us superstore in Minnetonka, the CEO of the country's largest toy retailer seemed, well, like a kid in a toy store.

"Did you see this?" Storch said, referring to a new Lego hologram display. "Isn't that cool?"

Once destined for oblivion in the face of withering competition from Wal-Mart Stores Inc. and Amazon.com, Toys 'R' Us has found some spring in its step. The company is aggressively remodeling its stores and beefing up its online business. Toys 'R' Us teams are scouring the globe, looking to score exclusive merchandising deals. In June, the company filed plans for an initial public offering that could raise $800 million.

Despite its progress, Toys 'R' Us faces myriad challenges, including a weak economy and less-than-impressive sales growth. Last year, the retailer generated $13.9 billion, just a 2 percent gain from 2009, according to documents filed with the Securities and Exchange Commission.

Continuing volatile equity markets could delay a Toys 'R' Us IPO, although Storch declined to comment. And Wal-Mart recently announced that it's cutting prices on some toys this month to $15, an early effort to goose holiday shopping.

Much of Toys 'R' Us' new energy comes from Storch, a former vice chairman at Minneapolis-based Target Corp. who joined the toy retailer in 2006 after it was purchased by private equity firms Bain Capital Partners and Kohlberg Kravis Roberts & Co.

"We have a saying here, 'We play to win,'" Storch said. "We're not playing defense. We're playing offense. We have a great brand. People have warm, positive feelings toward the brand. It would cost billions of dollars to build a brand like this from scratch."

To help change the culture, one of Storch's first acts as CEO was to replace nearly the entire executive team.

"There's no example of a successful turnaround without changing the senior leadership team," he said. "It's the most important thing you can do."

The key to Storch's turnaround strategy rests on store remodels. Instead of operating Toys 'R' Us and Babies 'R' Us as separate stores, the company is combining the two concepts under one roof in a superstore format or operating them side by side.

The strategy helps Toys 'R' Us in two ways, said Burt Flickinger III, managing director of Strategic Resource Group, a consulting firm in New York. First, the company can drive greater efficiencies through the superstores instead of scattering Toys 'R' Us and Babies 'R' Us in different locations, he said.

Second, a superstore format offers consumers a broader and deeper assortment of products, Flickinger said. In the past, people would visit Toys 'R' Us once or twice a year to buy gifts. By selling consumables such as baby food and diapers, the stores attract more frequent shoppers, he said.

At the 62,000-square-foot Toys 'R' Us in Minnetonka, the store is about evenly divided -- toys on the left, baby stuff on the right.

In addition to top-selling toys, Storch says the store carries a good deal of exclusive merchandise. The retailer offers both licensed brands like Home Depot tools and Animal Planet sharks and company-owned brands like FAO Schwarz. (Toys 'R' Us acquired FAO Schwarz, including its famed Fifth Avenue store in New York, in 2009.) Toys 'R' Us, which operates stores in 34 countries, stocks its shelves with products from Germany and Japan. In the baby section, shoppers can find everything from strollers and cribs to car seats and clothing.

Most parents have more than one child, Storch pointed out, which means they can shop for a baby and a toddler in one trip.

"We want to be a true kids authority out of one box," he said.

Toys 'R' Us is also heavily investing in the Internet. Under Storch, who a decade ago oversaw the launch of Target.com, the company has snapped up domain names like toys.com and etoys.com. Toys 'R' Us is building a new Internet distribution center outside Reno. In 2010, the company generated about $782 million in online sales, a 30 percent gain from the previous year, according to Internet Retailer. Toys 'R' Us now ranks 29th out of the top 500 Internet retailers, the publication said.

In a way, Storch has remade Toys 'R' Us in the image of Target with a heavy focus on clean store design, exclusive merchandise and a broad product mix.

"Gerry Storch has learned a tremendous amount from Target," Flickinger said.

Storch says he appreciates his time at Target but the two companies are completely different. Target is a general merchandise discounter while Toys 'R' Us is "an expert in its field," he said.

"Toys 'R' Us is finally becoming what Toys 'R' Us should have been," Storch said.

Thomas Lee • 612-673-4113