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Toys R Us, hurt by Web site losses, posts 75 percent drop in profits

TRENTON, N.J. — Children's retailer Toys R Us Inc. on Monday reported a 75 percent plunge in profits for its second quarter as sales cooled and losses from its year-old Web site cut earnings. Still, the company beat analysts' expectations by a penny.

The Paramus-based seller of games, toys, clothing and other items for children said net earnings for the three months ending July 29 totaled $3 million, or 1 cent per share, beating the break-even forecast of analysts surveyed by First Call/Thomson Financial. A year earlier, net earnings totaled $12 million, or 5 cents per share.

Meanwhile, sales slid 9.5 percent, to $2 billion from $2.2 billion. The company said second-quarter revenues were hurt by the lack of hot toys compared to last year, when Furby and Star Wars items were all the rage. Although comparable store sales were up 3 percent for the second quarter outside this country, comparable U.S. toy store sales dropped 2 percent for the quarter.

But Toys R Us, the country's top-selling toy retailer until it was overtaken by discounter Wal-Mart, is staying in the game, making changes and deals to reverse its fortunes.

"Clearly, you've got a CEO who's doing a lot to try to re-energize this company,'' said Ursula Moran, a senior retail analyst at Sanford C. Bernstein in New York. "The preliminary signs are pretty positive.''

Since appointing John Eyler as president and chief executive officer, the company has continued remodeling stores to improve layout and spent $449 million to buy back 31 million shares of its stock, nearly doubling the price.

Toys R Us shares were up 62.5 cents, or 3.6 percent, to $18 Monday on the New York Stock Exchange,

Last week, the company announced plans to abandon its year-old in favor of a joint Web site with giant Internet retailer, a strategy meant to make Toys' online business profitable two years earlier.

"In one fell stroke, they eliminated a potentially very significant competitor in the category and they gained expertise that they don't have now,'' Moran said. lost $20 million before taxes in the second quarter, said company spokesman Louis Lipschitz. Excluding that, the parent company's second-quarter profit would have been $16 million, or 7 cents per share.

"We will be the global leader for toys, children's and baby's products on the Internet,'' Eyler predicted.

Meanwhile, Moran said, the company is beginning some other alliances, including alliances with Oshkosh for exclusive baby toys, games and plush animals and with Home Depot to make child-sized tools, accessories and construction kits for items such as birdhouses. The company also has a partnership with the fast-growing Animal Planet cable TV channel to develop electronic and other interactive toys based on wildlife, she said.

For the first six months of its fiscal year, Toys R Us reported profits jumped 650 percent, to $218 million or 97 cents per share, compared with $29 million or 12 cents per share a year earlier. That included a pretax gain of $315 million in the first quarter from the initial public offering of part of the company's Japanese subsidiary, Toys R Us-Japan.

Excluding that gain and the Web site loss, net earnings for the first six months would have been $40 million, or 18 cents per share.

Sales for the first six months totaled $4.31 billion, down from $4.37 billion a year ago.

Toys R Us now operates 1,553 stores, including 707 U.S. toy stores, 470 international toy stores, 201 Kids R Us clothing stores, 137 Babies R Us stores and 38 Imaginarium stores.

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