Fitch revises Toys 'R' Us outlook to negative

Fitch Ratings said it has affirmed its ratings of Toys 'R' Us' senior notes at BB+, and has revised the company's outlook to negative from stable.

Fitch said the outlook change reflects persistent weakness in the company's U.S. toy business, and growing competitive pressure from Wal-Mart and Target. Comparable store sales in the U.S toy division, which accounted for 60% of Toys 'R' Us 2002 revenues, declined 3% during the third quarter, due in part to a drop in video game sales.

Soft results also reflected a more aggressive toy pricing posture by Wal-Mart. Competitive pressure from Wal-Mart and Target is expected to be intense during the holiday season, when both chains use toys to drive store traffic. This pressure will be sustained over 2004-2005, as Wal-Mart and Target continue to build stores and expand their selling space.

Fitch said that helping to offset negative operating trends is Toys 'R' Us's more conservative financial posture, and expected reduction in leverage over the next few years.

The company has prefunded $800 million of debt maturing early next year. In addition, $390 million of equity security units are expected to convert from debt to equity in 2005.

The company has the liquidity in place to handle its inventory swings without having to tap its revolver. Moreover, the company should be in a positive free cash flow position over the next few years, and does not plan to repurchase its shares, the agency said.

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