OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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Toys "R" Us can finally tout its new format nationally….

OID: How far along is Toys "R" Us in the process of revamping their stores?

Nygren: At least in their NFL markets - the major city markets - they're done. And that's allowing them to do national advertising about their new store format for the first time. However, I'm not certain on whether every one of the smaller markets has been done at this point or not. But if they're not completely done, they're close to it.

Last year they were ready to do a national advertising campaign focused on the opening of the Toys "R" Us store in Time's Square. And it was this thing of Geoffrey the Giraffe running down Broadway with lots of loud noise. However, after 9/11, they felt that it was too scary for kids. So they pulled the campaign. And they basically weren't able to advertise the changes they'd put in place in the way they expected to. So that slowed them down. However, I don't think that's changed the likelihood of success.

And 9/11 didn't help.

Nygren: They expected 10 million visitors a year past the Time's Square store. But with New York tourism down last year, the amount of traffic past the store just isn't what they expected it would be.

It hasn't affected their sales numbers. The store's above plan in sales and profitability. But [with the lower than expected] number of visitors - who then go back to their home markets and say, "Wow, Toys "R" Us has really changed. You've got to go check out the local store. The coolest store I've ever been in was the Toys "R" Us Time's Square store." - the word of mouth just hasn't been quite as powerful as they'd hoped because there haven't been as many impressions.

Can a specialty retailer succeed in toys? We think so.

OID: Following the upgrade, has the competitive threat from Wal-Mart proven to be more or less of a factor than you thought it would be two years ago?

Nygren: The whole issue for the toy industry is the fact that Wal-Mart and Target can undercut just about everybody else on price. And the question is do the same characteristics that attract people to specialty stores rather than discount stores in other industries also apply to the toy industry? We believe that they do. However, to date, we haven't seen a good example of somebody operating a toy specialty chain well since Toys "R" Us a decade ago.

Toys "R" Us brought discount retailing to the toy industry. When they started out, most toy sales were in department stores or small specialty stores - and I mean really small stores - a couple thousand square foot stores, almost hobby shops. So Toys "R" Us was the one who originally brought discounting to the industry.

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