Demise of Toys 'R' Us forces manufacturers to deal with new retailers, complex orders

By Paul Ziobro 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 23, 2018).

The demise of Toys "R" Us is forcing manufacturers to confront the complexities of selling billions of dollars worth of Barbie dolls, Nerf blasters and other playthings at thousands of new locations.

Hasbro Inc.'s first quarter after the toy retailer's liquidations showed just how hard it will be to adapt.

The Pawtucket, R.I.-based toy company on Monday said the disappearance of Toys "R" Us not only damped demand, leading to a 12% drop in third-quarter sales. It also made Hasbro more reliant on sellers with order patterns that are vastly different -- and less advantageous -- than what they got from the toy superstore.

Year in and out, toy manufacturers could rely on Toys "R" Us to buy a large order of toys to fill its warehouses and stores. In prior holiday seasons, many Toys "R" Us locations filled their backrooms and stacked toys like Barbie Dreamhouses and Lego sets high above shelves months ahead of Christmas in anticipation of in-store crowds and online sales that would tap into that inventory.

In the new retail landscape, manufacturers ship smaller quantities to thousands of extra retailers, from general merchandise retailers like Target Corp. and Walmart Inc., to drugstores and dollar stores. Since they aren't just toy merchants year round, they want the inventory much closer to the holidays, when they convert seasonal shelf space to selling toys.

Online retailers like Amazon.com Inc., which many analysts expect to play an outsize role in the industry going forward, demand smaller shipments that they want to sell through before getting their next order.

"We're working with a greater variety of retailers that have differentiated shipping requirements," Hasbro Chief Executive Brian Goldner said Monday on an earnings call. The company, he said, has added 10,000 new places to sell its products just over the past year.

Hasbro is making changes to adapt that it hopes will ease some problems, like $50 million in orders that it wasn't able to fulfill by the end of September. Next year, it plans to build a warehouse in the Midwestern U.S. that can cut down delivery times and distances to retail distribution centers, and is looking to share warehouse space with some retailers.

It is also restructuring the organization in ways it says will meet the needs of today's toy consumer and retailer. The changes will affect less than 10% of its 5,400 global workforce, cutting $40 million in annual costs.

Mattel Inc., which earlier this year cut 2,200 jobs, or a quarter of its nonmanufacturing workforce as part of a broader restructuring, is also working through the Toys "R" Us disruption. It has been poring over data to pinpoint what products to send to what retailers that were near former Toys "R" Us stores. The El Segundo, Calif.-based manufacturer reports its third-quarter results Thursday.

Total revenue fell about 7% in the U.S. and Canada, where Hasbro said it was able to recapture about one-third of the lost Toys "R" Us business. Declines were steeper overseas, where revenue dropped 24%, led by a big drop in Europe, where retailers continue to sell their existing Hasbro inventory.

Overall for the period, Hasbro's earnings fell 0.6% to $263.9 million, or $2.06 a share. On an adjusted basis, earnings fell to $1.93 a share from $2.09.

Mr. Goldner said that the disruption stemming from Toys "R" Us's exit is expected to last for a few more quarters.

Other elements of Toys "R" Us will continue to be hard to replace. Nerf, in particular, had a big down quarter, because in last year's period Hasbro joined with Toys "R" Us on a "Nerf Fest," where customers could get free toys and try out the latest blasters. The event went global this year -- even sold at new outlets like sporting-goods retailers -- but sales were still down.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

 

(END) Dow Jones Newswires

October 23, 2018 02:47 ET (06:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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