Competitors’ price cutting over and Toys R Us ready to play ball

Despite unveiling falling revenue and a net loss, Toys R Us managing director Louis Mittoni says the toys sector is stronger than many discretionary retail categories.

The ASX-listed Toys R Us expects its recent investments to drive sales in Australia and the UK.

The boss of online toys, hobbies and baby goods retailer Toys R Us believes last year’s aggressive price slashing by competitors to clear inventories is almost over, which should revive profit margins.

And the company is focused on its promising expansion into the multibillion-dollar British market.

Toys R Us managing director Louis Mittoni said the toys sector was showing signs of resilience despite the drag on consumer spending and confidence caused by the string of interest rate rises. He said toys, hobby products and baby goods were stronger than many other discretionary retail categories.

“To some extent families don’t consider it (toys and hobbies) a discretionary item; they still need to buy Christmas presents and birthday presents, and we haven’t seen any adjustment in the amount that people are spending,” Mr Mittoni said.

The ASX-listed Toys R Us said revenue for the first half fell 4.6 per cent to $22.297m as its net loss worsened to $9.123m from a loss of $4.32m in the previous corresponding period.

While there was a contraction in sales for the British market, the Australian toy and hobby market still grew.

The higher loss for the half to January 31 included several non-recurring expenses, such as costs associated with setting up in Britain, consolidation of Australian operations into the Clayton distribution facility in Melbourne, and expansion of storage capabilities.

The ASX-listed Toys R Us owns the licences to the Australian and British e-commerce websites for Toys R Us and Babies R Us, as well as a hobbies and tech distribution business.

For the first half, Toys R Us achieved year-on-year growth in group direct-to-consumer order volumes due to its expansion into Britain during the seasonally strong trading period. B2B wholesale revenues decreased 27.8 per cent to $5.2m, impacting the total group-reported results.

Mr Mittoni said there was heavy price competition in the toy sector as rival retailers attempted to clear stock, and which impacted Toys R Us, and he said traditional earnings margins of about 25 per cent fell to just over 17 per cent.

However, he said retailers were now starting to act more rational in terms of pricing, with that rebound starting and Toys R Us expecting margins to trend higher.

Mr Mittoni believed the business had huge opportunities in Britain, where it last year launched the Toys R Us brand back into a country that is a multibillion-dollar toy, baby products and hobbies market.

“Outside of the US it is one of the largest toy market globally; it is the largest in Europe,” he said.

“We have put in a lot of significant one-off costs that have affected and impacted our result this period. But that investment is really to help drive the UK and Australian operations because we expanded our facility here, we consolidated everything.

“The message really is we are really at the beginning, we have only just started in the UK, two months into the peak season with really minimal inventory as well.

“So once we start to optimise these things through this calendar year it is a massive opportunity because we have really only just scratched the surface.”