Seems like few Aussies are into buying toys online as online toy retailer Toys“R”Us (ASX: TOY) reports total losses of up to $25 million despite increasing its marketing budget by over threefold! The Company is the exclusive licensee for Toys“R”Us, Babies“R”Us and associated intellectual property in Australia and New Zealand, where it relaunched in 2020 after shutting down in 2018. In October 2021, the Company also signed a long-term exclusive license agreement to launch and operate Toys“R”Us and Babies“R”Us in the United Kingdom.

In FY22, Toys“R”Us reported a revenue uptick of 74% year-on-year, reaching $37.9 million, reflecting significant growth across the Company’s direct-to-consumer (B2C) and (B2B) continuing operation segments. Its B2C revenue increased by 98% to $26 million, while B2B rose by 28% to $11.1 million. Toys“R”Us’ gross profit on sales improved to 21%, up 2% on FY21.

Still, its year was not a joy ride. It suffered a statutory net loss after tax of $24.7 million, up significantly from $3.1 million in FY21. As per its report, the losses reflect the recognition of a goodwill impairment charge valued at $14.5 million relating to the B2C segment. Citing supply chain and Covid-related disruptions, it claims that it had to increase operating expenditure and marketing expenses. In fact, the Company increased its marketing and selling investment from $1.5 million in FY21 to nearly $6 million in FY22. 

Toys“R”Us ANZ CEO and Managing Director, Louis Mittoni, commented, “We are pleased to have achieved positive organic growth in FY22 against a backdrop of decreased Australian toy industry sales and increasingly challenging trading conditions. In delivering growth, the Company overcame the effects of elevated COVID-19 cases across Australia and mixed Australian consumer confidence in H1, and the flow-on effects of the outbreak of war and expectations of higher interest rates in H2.” 

As it scrambles to gain customer confidence, the Company has been granted a three-year loan facility of $15 million secured in July 2022 to support working capital and capex requirements for its planned entry into the UK market and e-commerce launch. The loan is repayable at the end of July 2025 and as at the balance sheet date, the Group has already utilised $10 million of the loan.

To further address losses, Toys“R”Us is relying on its vast portfolio, including the 30 new brands added between August 2021 and January 2022. Much of the stuff was pre-ordered to cater to seasonal peak demand in November 2022. 

The Company is also betting big on its UK expansion, as it is set to make a digital-first entry in Q4 CY22 to deliver eCommerce services to UK shoppers for the holiday and new year season in late 2022. It has already appointed third-party logistics (3PL) specialist Amethyst Group as warehouse and logistics provider. The UK represents a significant near-term growth opportunity for Toys“R”Us. In 2021, the online share of UK toy sales grew to 60%, confirming that not only is the UK one of the most advanced e-commerce markets in Europe, but this advantage is significantly more pronounced in the toy industry.

Mittoni added, “We are now ready to scale up in the UK, having carefully built the operational capability to meet shoppers’ expectations and demand from market launch right through to the peak trading season. We continue to pursue our medium-term goal of 5% market share penetration in the toys, baby and hobby markets in all licensed regions.”

No doubt, the FY22 losses have shook investor confidence. In the coming year, Toys “R” Us expects to make up for them by focusing on delivering growth in profitability and cash flow.

Will the Company have to consider renaming itself Toys“R”Bust?