DPZ Dominos Pizza Inc

More than a decade after Toys "R" Us Inc. was acquired in a leveraged buyout, the retailer is still struggling with a chronic problem: running out of goods during the important holiday season.

To tackle the issue, Chief Executive David Brandon, who took the helm in July, asked engineers to design an algorithm to better predict when goods will run low. He also is filling shelves with more products—a move that is counter to the get-lean mind-set of Wal-Mart Stores Inc. and other retailers.

Making sure Toys "R" Us has enough items to sell is a lesson he learned early in his career as a manager for Procter & Gamble Co., overseeing brands such as Crisco oil and Jif peanut butter. It is also part of a larger strategy that he hopes will help get the company back on track as he prepares to take it public next year and provide its private-equity owners with a long-awaited exit.

"If a customer can't find what they're looking for at your store 60% of the time, they will shop somewhere else and never come back," the 63-year-old Mr. Brandon said in a recent interview. "We want our stores to be bulkier," he said of the effort to stuff shelves with more goods. "We call it full and chunky."

Retailers walk a fine line between having enough merchandise, but not too much. The latter requires markdowns to clear unsold goods, which hurts profits. The former results in missed sales.

According to a report from DynamicAction, a software analytics company, and research firm IHL Group, stock-outs cost retailers about $634 billion annually in lost sales.

Mr. Brandon is taking charge of Toys "R" Us during what appears to be a banner year for the toy industry. Sales through September were up 8% compared with the same period last year, according to retailers that participate in NPD Group's tracking service, which represents about 80% of the U.S. retail toy market.

But the former Domino's Pizza Inc. CEO has his work cut out for him. A string of executives have tried and failed to turn around the toy chain, which was acquired in 2005 for $6.6 billion by Bain Capital Partners LLC, KKR & Co. and Vornado Realty Trust. The company lost $292 million last year, which followed a $1.04 billion loss the prior year.

Paul Berberian, the chief executive of Sphero Inc., maker of the "Star Wars" BB-8 Droid, one of the season's hot toys, said he prefers to sell his products in Apple Inc., Brookstone and other specialty stores. "Consumers want higher quality, deeper experiences," he said. "Toys "R" Us is plastic by the pound."

Mr. Brandon said Toys "R" Us has carved out a different position from rivals by having the broadest selection of toys. It is selling hundreds of "Star Wars" products this holiday season, including some exclusives such as an interactive Chewbacca action figure. The company is trying to enrich the store experience with events like one in October that invited children to build and take home a Lego structure.

But Toys "R" Us, which has about 1,800 stores world-wide, needs to make sure shoppers don't go away empty-handed. Before Mr. Brandon arrived, stores were considered to be in stock if they had three of a particular item. "If someone came in and bought those three items, we'd be out of stock, which meant we were out of stock a lot," Mr. Brandon said. Fuller shelves are more appealing to shoppers than half empty racks that look picked over, he said.

Citigroup analyst Jenna Giannelli said the company's in-stock rates are running about 95%, better than in past years. A Toys "R" Us spokeswoman declined to verify the in-stock figures.

Online, Toys "R" Us seems to be fairing less well. On Black Friday, the retailer's website was in stock 62% of the time on 100 top selling toys, according to an analysis by price-tracking firm 360pi. That was roughly on par with Wal-Mart Stores Inc., which had a 63% in-stock rate, and better than Target Corp.'s 51% rate. But it was worse than Toys "R" Us's 76% in-stock rate last year.

"If Wal-Mart is out of stock, they can sell something else," said Sean McGowan, an analyst with Oppenheimer & Co. "If Toys "R" Us is out of stock, it ruins their whole image as the place to go for toys."

The Toys "R" Us spokeswoman declined to comment on the 360pi data, but said there is always the chance that popular items will sell out on peak days. Target said it continues to restock inventory throughout the season. Wal-Mart declined to comment.

Mr. Brandon concedes that Toys "R" Us's digital platforms, which account for about 10% of its more than $12 billion in annual sales, are "clumsy." After years of outsourcing its e-commerce sites, the company is now building its own platforms.

Mr. McGowan, the Oppenheimer analyst, said Mr. Brandon is saying all the right things, but so did his predecessors. "Other people identified the problems," Mr. McGowan said. "They just couldn't fix them."

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

December 14, 2015 20:45 ET (01:45 GMT)

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