Toys R Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %>

461 From Road

Paramus, NJ 07652-3524

(201) 262-7800

UNION CITY, Ca., August 19, 1996/FOOLWIRE/ --- Toys R Us released their Q2 1996 results this morning. Sales for the quarter were up 8% to $1.7 billion compared to $1.6 billion a year ago. For the first 6 months of 1996, sales were up 9% to $3.4 billion versus $3.1 billion a year ago. Preliminary Q2 net earnings increased to $27.1 million or $0.10 per share, versus $15.8 million or $0.06 per share last year. For the first six months, net earnings increased to $45.8 million or $0.17 compared to $0.12 a year ago.

The strengthening of the dollar has had a negative impact on their overall sales increase. Excluding the impact of foreign currency, their sales were up 10% for the quarter and over 11% for the first six months.

As previously announced on July 12th, an arbitration award was rendered against Toys R Us. The amount of the award, plus interest and related costs is approximately $55 million. They are contesting this award and will finalize the related accounting on or about September 17, 1996 when they file their form 10-Q with the SEC. They are shocked by the amount of the award and disappointed by the decision in this matter. They believe the findings of the arbitrator are not supported by the evidence presented in the case. In order to report their earnings as scheduled, they have given a before and after impact of the award.

If the company had to record the entire $55 million amount, it would reflect a net loss for Q2 of $7.5 million or $0.03 per share. For the first six months, net earnings would be $11.2 million or $0.04 per share. It is important to remember that even if the company has to pay this award, and they hope they don't, it will not impact any of their plans for 1996 or the future.

On a comparable store basis, all of their divisions reported comp store increases. Their US toy store comp increase was 6% for both the quarter and the first half. The Kids R Us comps were up low single digits. They are pleased that they continued the positive trend experienced in Q1. These increases were driven by strong sales of basic toy products such as games and dolls. Their program to strategically reposition their inventory is heading into its final stages. They are happy with the level of clearance sales to date and their content and their inventory assortment for the holiday season will be excellent. They have one more major event planned for Q3 with more advertising scheduled.

The company was asked, in terms of the clearance merchandise, if they have stayed on track for getting those SKUs out of the system and how much more is there to go. The company responded that they are pretty much on plan to get the merchandise out of the stores and be relatively clean by mid-October. They still have one more major event which will happen fairly soon. They will not be completely out of this merchandise by October 15th, they will have some clearance merchandise in certain categories that really do not sell well until you get into the November/December period. But they are very confident -- they are starting to re-lay their stores right now and in certain aisles they have, in effect, taken the clearance out and are pretty well set.

INTERNATIONAL COMPS AND RETAIL ENVIRONMENT

Their international division, on a local currency basis, also achieved an overall comp store increase. By region of the world, their comp store sales were as follows: UK comps continued to be the strongest of all the international countries with comp store sales increasing in the double-digits. Their Canadian and Central European comp store sales were up in the low single-digits. In France and Spain business continues to be sluggish reflecting the economic environment in those countries. Their Japanese comps were down low single-digits primarily due to the calendar flip of Golden Week which fell into the first quarter this year, but was in Q2 last year.

The business in Germany was up low single digits in terms of comps which is an improvement over trend in the first quarter. In Germany, starting November 1st, the German retail opening laws will be changed and there will be longer Saturday and evening opening hours which will be very helpful for them, particularly in the November/December timeframe when the German consumer is constrained in terms of shopping in that the stores cannot handle the crowds, so this could help a lot.

France is still down and is a very sluggish economic environment. Their French team feels strongly that as we get to the latter part of the year, they will turn that around. They will also be up against the transport strike numbers, which makes for very easy comparisons as they get into the peak of the season. But the French, Spanish, and German economies are pretty weak. One other note on France is that while they were down in comp store sales in Q2, but more than half of that decline was in their bicycle business because the French have recently put a new regulation into effect forcing mandatory equipment on bikes, which forced the price points to go up dramatically. That, in turn, hurt their business in terms of flooding the market before that time with all the bicycles that would be non-complying and then after that forcing the price points up, in many cases 50% higher than where they have been in the past. They feel that, despite the tough economic situation there, they are looking at improvement in Q3 and Q4.

Since the release of Nintendo 64 at the end of June, their Japanese comp store sales have been quite strong -- up high single digits. The success of the Nintendo 64 in Japan bodes well for the rebound of the video market in the US during Q3 and Q4. There have been lots of newspaper articles about Nintendo 64 and one of the criticisms has been the lack of software, it came out with only 3 titles. One of them, Mario 64, has been a phenomenal title. The key is going to be getting more software out there and creating the real excitement on the system. But they are real pleased and not only did it help in terms of the overall sales just on the Nintendo 64, but they did see some strong comp store sales increases in the video business in Japan. Also, Nintendo has lowered the price in Japan on the 16-bit machines to $99 and that has really helped the sales of the 16-bit machine which is still a very strong platform and there is still a lot of software there. They are doing well with Sony PlayStation, so 32-bit machines are doing well in Japan also. They saw some cannibalization, but wouldn't go into specifics on that. In looking at it from a Toys R Us perspective, the Nintendo 64 sales seemed to be additive, they didn't see a drop off in sales for the other systems. Nintendo intends to launch the 64-bit system in the US with 6-9 software titles.

P&L AND BALANCE SHEET HIGHLIGHTS

Overall, net profit in Q2 was positively impacted by a shift in their sales mix towards higher margin, basic toy merchandise as well as their strategic inventory repositioning initiative. For the first half of the year, their margins are up 20 basis points. Even more pleasing is the fact that, for the second quarter, their margins were up 60 basis points and they expect the positive margin trend to continue.

They are hoping that everyone in their industry is going to be a little smarter this year, including themselves, and not give too many things away and make it an absurd pricing environment out there. It is too early to tell. They have seen some positive indications in that they are not seeing as much absurd pricing, but they are still seeing some of it by the discounters. Hopefully they will look at it and ask "Why are we giving this away?" because they are not doing that much more business on an item, they're just throwing gross margin dollars. To sell toys with virtually no margin at this time of the year, particularly when there is nothing that is that hot right now, to Toys R Us, is just tossing away gross margin dollars. So they are hopeful that what they are seeing now is a trend to very competitive pricing, but at least intelligent competitive pricing and not pricing where people are just giving it away. They admitted that they were guilty of this last year also, but they are starting to see some change and that should help on the margins.

While SG&A is up 7% on a worldwide basis for the quarter and 8% for the first half of the year, the increase is primarily due to new stores open in the latter half of 1995. More importantly, as a percentage of sales, their SG&A decreased 10 basis points for the quarter and 20 basis points for the first half, primarily due to leveraging and expense management.

Interest expense for the quarter was down $1.9 million versus last year, as expected. For the first half interest expense was up $2 million compared to last year due to the high borrowing levels they had during the first quarter. Despite their aggressive expansion plans, they have been able to reduce their short-term borrowing levels from the first quarter due to their comp store sales increases and the implementation of their restructuring initiatives. Their balance sheet is extremely strong. Their short term borrowing net of cash decreased by $167 million.

Their comp store inventories continue to be down versus the prior year by 8%. Toys R Us is down 8% in the US and international inventory levels are down almost 10%. Kids R Us comp store inventories are slightly up due to changes they have made for Back-to-School receipts.

EXPANSION AND NEW STORE CONCEPTS

Their 1996 store expansion plans are well underway. They have now opened 3 of their Babies R Us stores. Results continue to exceed expectations. They are very pleased with the high level of service and exciting merchandise offerings they are providing to their customers. Most encouraging is the excellent feedback they have received from their customers. Their Baby Registry continues to be a hit with expectant parents.

They unveiled their first Concept 2000 store on July 13th in Rariton, NJ. They have subsequently opened two additional Concept 2000 stores, one in the Philadelphia area and one in Orlando Florida. Their new innovative concept is designed to satisfy their customer's needs by making their stores easy to shop as well as creating a fun and exciting shopping atmosphere. The response from their customers has been overwhelmingly enthusiastic. They will open 12 Concept 2000 locations this year including the 3 already open.

Their superstore, Toys R Us Kidsworld will be showcased in 2 locations. One will be a ground-up store next to IKEA in Elizabeth, NJ and one a retrofit of an existing Toys/Kids in Fairfax, VA. As with the other new concepts, they believe that all the amenities that their Kidsworld stores will offer, coupled with the convenience of having all of the "R Us" concepts under one roof, will create a shopping experience like no other. They have scheduled a tour of their Kidsworld store in Elizabeth for stock analysts on October 22nd.

MERCHANDISE OUTLOOK

With regard to probably the most important factor in their business, the merchandize outlook, the successful release of the Nintendo 64 in Japan has them optimistic for a stronger video business, not only in Q3 and Q4, but well into 1997. Also, Nintendo has just released last Friday that they will be reducing the suggested retail price on the 64-bit machines in the United States to $199. That will be in line with the Sony Playstation and Sega Saturn prices, which should make all 3 systems much more attractive to consumers. In terms of availability of the Nintendo 64 system in the US, Nintendo indicated initially that the quantity available in the US would be 500,000 units prior to Christmas and then another 500,000 by March 31, 1997. There have been indications in the press and conversations about some uptick in those numbers, particularly prior to Christmas. Toys R Us has not received any confirmation of that and are waiting to hear. It looks like, right now, it is going to be a very limited release. They are hoping that the decision to lower the price point to $199 would be an indication that the company intends to up the number of units available. The release date in the US is September 30th.

Also, on September 3rd, Nintendo will be coming out with Pocket Gameboy, which will probably retail for $59.99 and they think that is an exciting product for the second half of the year. They are also patiently waiting for a rebound in the video software business and they think that there's a strong lineup of projected hits for this year. To give some examples, Sega Saturn will have Knights, which is their key item for 1996 and the key item for the Saturn system and that's going to be out at the end of this month. Also by the end of August will be Tekken 2 which is a major Playstation hit from Namco. And later on Sony will have their key item on the Playstation. Nintendo will be launching Nintendo 64 with Mario 64 and for the 16-bit systems there will be Donkey Kong 3, continuing the series by Nintendo for their system. And, for Genesis, Sonic Extreme. There are quite a few things happening in the video business, and hopefully that will energize the video game business for the Fall and into next year.

In terms of the toy business, the licensed area has been fairly weak this year, but they think that should start to change as we get into the latter part of the year. In terms of underlying trends, they have a number of factors to take into account. One is how much extra business are they getting because they are in the middle of a clearance program. That is being offset by how much they are losing now because there is nothing hot. The toy industry has been in a situation where there has been a lack of really hot, exciting toys for some time now. Unfortunately what they were counting on for this year to give it a little life was the Disney release of Hunchback which wasn't as promising as a typical Disney animated movie. Beyond that, there aren't too many new introductions out there. They all come in the Fall. The toy industry needs newness, excitement, and innovation. They think that is coming. One area is the video game business and they think that the introduction of the new Nintendo platform and new software as well as mass market price points should energize the video game business. And they should start seeing a new trend of stronger, not only hardware, but eventually stronger software sales starting in Q3 and Q4 and accelerating into next year. That is one part. The second part is the basic toy business. Since Power Rangers and, to some degree, Lion King there hasn't been a licensed product that really has captured the imagination of children. They think some of the new releases coming up should help. Coming in Q3 and Q4 will be movie releases and video releases including 101 Dalmations which Disney is already starting to advertise, Space Jam which is the Warner Brothers movie with Michael Jordan, and Toy Story the video release from Disney. These releases with the continued success of Star Wars and Goosebumps hopefully will lead to excitement in the licensed toy area in the second part of 1996.

As was the case in the first half, they expect to continue to be strong in board games, radio remote control, die cast vehicles, Barbie, and infant/toddler dolls. This year they have experienced a strong upturn in their bike business over the past 90 days and that should continue in the second half. Finally, they expect their juvenile business to continue to be excellent.

The results for the first half have been good, particularly in Q2. They have continued the momentum generated in Q1 and have positioned themselves well. They are excited about the coming months as they look to reap the respective rewards of all their new initiatives.

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* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 8/20/96

Copyright 1996, The Motley Fool
All Rights Reserved. This material is for personal use only.
Republication and redissemination, including posting to news groups,
is expressly prohibited without the prior written consent of The Motley Fool.