OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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Toys "R" Us' shopping environment is so different today.

Nygren: I took another walk through the Toys "R" Us Time's Square store yesterday. And you might ask - and it's a reasonable question - what can you possibly learn from walking through a Toys "R" Us store? Well, it was crowded. That's a blinding glimpse of the obvious - that two weeks before Christmas it was crowded.

Berghoef: Thank goodness.

Nygren: However, if you've got memories of being in Toys "R" Us stores two or three years ago before Christmas, they looked like war zones. And while I was in this store yesterday, I must've had four different people come up and ask me if they could help me find something. The store was clean. All the cashiers had lines, but they weren't unmanageable. I can't imagine that any of them were long enough that somebody put a product back on the shelf that they wanted to purchase. The shopping environment is so different than it used to be.

TOY is making progress even in this environment….

Nygren: The whole story of why we own Toys "R" Us is we think there's room for someone who doesn't have the absolute lowest prices to sell a better shopping experience with reasonable prices. In a stronger economy, we think that we'll see very significant earnings progress for this company. Yet even in what's still kind of a subpar year for them, the stock's at about 12 times earnings.

That's what we're hoping to learn when we get out of the office and go visit our managements or the properties that they have. It's [our way of asking], "What is changing long term? And how does that change the odds of the business becoming what we expect it to be looking out three to five years from now?"

We'll see shortly if Eyler's model works. I think it will.

Nygren: People always lose patience in turnarounds. It's one of the reasons we end up owning so many of them. If you talk to a CEO who does turnarounds, he'll tell you that it'll take five years to accomplish it. It takes a year or two to put the people in place. It takes a year or two to figure out what they need to change and to change it. And it takes another year or two to get the results from those changes. It doesn't happen at the snap of the fingers even though that's the way Wall Street wants it to happen.

Toys "R" Us is in year three of their turnaround now. The key people have all been replaced that John thought needed replacing. The facilities have basically been changed to the model that he wants. The merchandise has been changed. The last piece of the puzzle, I believe, is customers understanding the change that's happened, and a reasonably strong economy.

Hopefully, in another year, we'll see both of those pieces - and we'll see if the model that he's put in place is a workable one or not. I happen to believe that it is.

We think it's just a question of time frame.

Nygren: Toys "R" Us is a good example. You've got Wall Street analysts saying, "This turnaround obviously isn't working the way that had been expected." But I think it's a question of time frame. Like Henry said, the time frame that most analysts have is so short. And maybe that makes sense on a career basis for them rather than an investment basis - because they don't feel like they have the luxury of appearing wrong for a year.

But that's what we live off of. We don't expect our stocks to work the minute we put them in the portfolio.

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