Toys "R" Us Bull's Pen
by Rick Munarriz ([email protected])

On top of my eldest son's holiday wishlist is a Deceptor. It's a radio-control burner that transforms itself from a sleepy compact into a rugged off-road vehicle and back -- on the fly. There was only one place I could buy a Deceptor. Toys "R" Us.

It's a fitting exclusive store offering since shares of the leading toy retailer are a bit of a Deceptor themselves. Wall Street thinks it's watching a tripped behemoth. I'm looking at a company that is addressing these issues and transforming itself into a rugged plaything powerhouse, on and off line -- on the fly.

Now, I'll confess that I'm a kid at heart. I've been to Toys "R" Us four times over the past month and it hasn't all been in the name of Duel field research or flexing my Santaesque executive powers. While I'm sure Yi-Hsin would agree that my maturity level gets carded, my excitement over the chain's prospects runs as long as Geoffrey the mascot's giraffe neck.

Deceptor is a good place to start. Toys "R" Us has been flooding the airwaves with slick ads for its exclusive toy lines. Every Nickelodeon-watching kid is probably stuck on the annoyingly catchy Baby Slurp & Burp jingle. You want the doll? You have to go to Toys "R" Us. We won't know how well Toys "R" Us fared this holiday season for another few weeks. However, logic shines kindly on Toys "R" Us. Odds are that many kids want at least one of the Toys "R" Us exclusives. So if a parent has to go to Toys "R" Us for one item, he or she will probably do most, if not all, of the holiday toy shopping once there. This is brilliant marketing. It's certainly better than giving away fruitcake to the first zillion customers lining up at 5:00 a.m.

So the trap has been set. It's a genius move to draw folks in. But what will Toys "R" Us do once the patrons come in and grab a Deceptor in one hand and a 9.6 volt battery in the other? This is where you have to meet up with me at Toys "R" Us later tonight. Don't worry, they're open until midnight this time of year. For years, Toys "R" Us has lost market share. It still holds the lead, but recently discounters like Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> have beaten them on value pricing while electronic superstores like Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> have excelled in video game sales. Bleak? Hey, I told you to meet me at the store tonight, remember.

If you only had the past to rely on you would think that the "R" in the company logo isn't the only thing that's backwords at Toys "R" Us. But that's changing. That's the Deceptor, going from a bland vehicle into a monster truck ready to charge ahead in even the most unfavorable of surroundings.

The Toys "R" Us we walk into today is not the same one it was last year. For starters, the company is now stocked with select items that are being aggressively priced. From a healthy collection of clearance items (which are usually subsidized by the toymakers) and low-priced impulse items that would make Dollar Tree <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLTR)") else Response.Write("(Nasdaq: DLTR)") end if %> turn a new leaf, this is now a place of cost-conscious convenience. Toys "R" Us will match competitor pricing anyway, so who needs Wal-Mart? You are also finding an ever-growing aisle of N64 and PlayStation titles to go along with the hot new Color Gameboy. The selection of CD-Roms and videos has widened considerably. Who needs Best Buy?

Sure, you can wait a few months. By then Wall Street will appreciate what us foot soldiers are already figuring out. The Deceptor has shifted. Toys "R" Us is not backwards -- it's back! Words?

How about the Internet? A growth sector for sure, right? Toys "R" Us now offers online shopping. In my opinion its site blows eToys away. As the premier toyseller it certainly has the killer domain name. As word of the online store gets out, with e-tail in general expected to triple next year, what do you think toysrus.com will be worth? Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> sports a $14 billion market cap and toys, like books, are a natural for E-commerce.

If you conservatively guess that the potential of Toys "R" Us online is worth a third of Amazon's valuation then, guess what, Toys "R" Us is selling for toysrus.com with the brick and mortar stores thrown in for free. Free? Gee, 1400 stores worldwide with over $11 million in annual revenues. Free.

Or you can look at it this way. The new and improved Toys "R" Us is expected to grow earnings by 15% to $1.78 next year. You can have the brick and mortar stores for ten times earnings and get toysrus.com for free. Your choice. It's like, well, it's like a kid in a toy store.

Next: The Bear Argument