Toys R' Us, the nation's number 2 toy retailer, reported that same store sales declined by 5.6% during the first quarter of 2004.  Still reeling from the brutally competitive 2003 holiday season, which led to the bankruptcies of FAO Schwartz and KB Toys (see 'Wal-Mart Applying Category Kill-Shot'), Toys R' Us continues to face stiff price competition on best-selling toys from Wal-Mart, while its videogame sales are also under heavy pressure.  Videogame sales at Toys R' Us were down some 27% in Q1.  During the same period, GameStop, one of Toys R' Us' chief competitors in electronic games, posted record sales and saw its videogame software sales rise by 21% during the first quarter.  A recent study by Piper Jaffray (cited by Reuters) indicates that Toys R' Us had the second highest prices of the top seven electronic game retailers.

Toys R' Us is currently conducting a strategic review of its business plan and many observers feel that the company will have to close its poorest performing outlets and open more of the Babies R' Us stores, which have performed better than their Toys R' Us counterparts.  Toys R' Us is hoping that movie tie-in merchandise associated with Shrek 2, Harry Potter, Spider-Man 2, and The Incredibles will help the chain turn around a dismal start to 2004, but the company will also have to find a way to avoid the debilitating effects of the stiff price competition from its major rivals.