NEW YORK Wal-Mart Stores Inc made a few wrong moves in the all-important holiday toy sales game, a timely blessing for Toys R Us Inc, which is looking to go public.
From slashing its selection of toys to waiting until the 11th hour to convert garden centers into temporary toy aisles, the industry Goliath made costly mistakes in the biggest selling season of the year, analysts and manufacturers said.
"Wal-Mart, from everybody I talked to, did not have a good fourth quarter," with some toy makers calling it a "disaster," said Jim Silver, toy analyst at Timetoplaymag.com.
Wal-Mart's biggest mistake was reducing its selection of toys, Silver said.
Wal-Mart (WMT.N) declined to comment before its February 22 earnings report.
But Carter Keithley, president of the Toy Industry Association, said in an interview on Sunday, "What I have heard is they (Wal-Mart) decided they have made a mistake ... that they are going to re-expand their toy space."
The missteps by the world's largest retailer came as Toys R Us TOY.UL flexed its muscles by opening hundreds of temporary stores in malls, touted a wider array of exclusive toys and offered aggressive Black Friday promotions to win holiday shoppers.
"We always look for products that aren't carried by the limited assortment mass merchant chains. That's clearly a major focus," Toys R Us Chief Executive Jerry Storch told Reuters.
Last week, Storch said he was "very excited about 2011," though he declined to comment on the timing of the IPO.
TOY STORES REBOUND
Discount chains such as Wal-Mart beefed up their toy assortment years ago, enticing parents to spend more. Then, chains pared back assortments to focus more on basics.
"I don't think the shelf space at discount (chains) is back to the levels where it was in the early 2000s or mid 2000s," Vic Bertrand, chief innovation officer of Canadian toymaker Mega Brands Inc MB.TO, said at the Toy Fair in New York.
"I think that helps other retailers, especially a category killer like a Toys R Us," Bertrand told Reuters.
Some also questioned the not-so-prominent placement of toys at Wal-Mart's stores.
"They had the toy department at the back of the store and they expect the consumers to walk the whole store to get to the toy department," Silver said.
For the first time in a long time, toy stores took market share from mass market discounters in the fourth quarter, NPD analyst Anita Frazier said. Toy stores picked up one-half a share point, while the mass/discount channel retailers lost 3 share points.
"If you are a consumer and you walk into a Toys R Us and you have a choice of 7,000 different toys or you go to Wal-Mart where there is a choice of 1,800 different toys, that's a massive difference," Silver said. "I think their SKU reduction has led to them losing customers."
It is not just customers who are paying attention.
Wal-Mart seems to have lost some of its edge, according to Bill Smead, chief investment officer of Smead Capital Management, which owns Wal-Mart shares.
"The whole theory of owning Wal-Mart is that they can gain market share away from people that aren't nearly as efficient as them," said Smead. "People like us watch and say, you know, 'can they kind of get their mojo back?'"
THE PERFECT TIMING?
Toys R Us, which has filed to raise up to $800 million through an IPO, said U.S. sales rose 5.4 percent in December. Sales at its U.S. stores open at least a year increased 2.2 percent.
"Toys R Us' goal is they want to be first with everything," said Chris Beardall, executive vice president of North American sales at toy maker Spin Master. "They want to have exclusive segments within brands so they can differentiate from the discounters."
Target's (TGT.N) December same-store sales rose 0.9 percent, missing analysts' estimate of a 4 percent rise. The discounter blamed softness in toys for part of its weakness.
Some also blamed Wal-Mart's bigger focus on its grocery and electronics segments for the distress in its toy aisles.
"Whether you look at Target or Wal-Mart, toys are just a little accessory to bring the customers in," MGA Entertainment Inc CEO Isaac Larian said in an interview. "Toys are not really their focus. So this is what happens."
"Toys R Us grew fantastically. It comes at the expense of somebody else," Larian said.
The retailer, which was taken private in 2005 by Kohlberg Kravis Roberts & Co (KKR.N), Bain Capital and shopping center operator Vornado Realty Trust (VNO.N) in a $6.6 billion deal, filed for an IPO back in May. The strong holiday season boosts its plan to go public, industry watchers said.
"Given that they are getting stronger and their biggest competitor Wal-Mart is getting weaker, the timing makes sense. And the overall market is better for IPOs again," Silver said.
"We know that the IPO is imminent. They are coming off a good year in 2010," Silver said. The holiday season at Toys R Us "was better than anybody else's and they gained market share."
(Editing by Steve Orlofsky)