Tyco toiling to restore profitability Company altering mix to weather the swings in toy business

February 25, 1996|By KNIGHT-RIDDER NEWS SERVICE

NEW YORK -- Every toy manufacturer yearns to produce the year's Power Ranger and to watch that lovely upward spike on the revenue line.

But when the thrill is gone, the extra factory capacity, the extra marketing costs, the extra warehouse space remain, along with a not-so-lovely spike on the expense side and an accompanying nasty dip in earnings.

That has been Tyco's toy story.

The moral of the story comes from new Tyco Toy Inc. Chief Executive Gary Baughman, who says he wants "to re-establish 2/3 2/3 TC profitable base of core products" -- a strategy that will allow the company to weather the swings in the toy business and still pay the bills.

What sounds very normal in boardrooms and in annual reports seems utterly incongruent at New York's annual riotous Toy Fair, where giant yellow bananas in pajamas leaflet passers-by and blue Smurfs distribute business cards on Fifth Avenue.

Inside the Toy Building earlier this month, Tyco's own Dr. Dreadful chomped on candy cockroaches. An actor, in bloody surgical scrubs, touted Tyco's latest line of looks-bad, tastes-good, gross-out products before an appreciative audience of Wall Street analysts and toy store buyers.

Down the hall, Mr. Baughman talked numbers: "We expect a slight increase of sales, maybe 4 to 5 percent. And we're looking to be profitable."

That would, no doubt, charm Wall Street more than watching Dr. Dreadful suck up pretend body fluids as his sidekick Igor snickers sickeningly.

"Tyco used to be on top of the world," said analyst Jill Krutick at Smith Barney in New York. "Now they are a distant third [behind Mattel Inc. and Hasbro Inc.]"

Tyco, its reputation made with its radio-controlled line of toys, never had a money-losing year from 1974 until 1993. But the success of the Ariel doll from Disney's Little Mermaid had prompted the Moorestown, Pa., company to overexpand, opening subsidiaries in Europe and building up overhead at home.

The company lost nearly $70 million in 1993. It cut its losses to $33 million in 1994 and to $27.2 million in 1995.

In the past year, Tyco cut 200 jobs in Europe as it shuttered its Belgium manufacturing plant and eliminated a distribution center in the United Kingdom. It centralized Europe's administrative operations in Belgium, taking an $8.9 million charge in 1995 to realize savings of more than $10 million a year, Mr. Baughman said.

Tyco also reorganized its Tyco Playtime division, giving it a new name, Tyco Preschool, a new focus by eliminating all toys for older children, and a new selling strategy.

"The balance sheet is in better shape and the inventory and receivables are the lowest in five years," said analyst Sean P. McGowan, of Gerard Klauer Mattison in New York.

"They have really pruned back their least profitable lines and plunged most of their resources into line extensions," Ms. Krutick said.

A good example would be the approach that Tyco is taking with a core element of its business -- Matchbox cars. In the diecast metal car business, Tyco faces stiff competition from industry leader Mattel and its Hot Wheels line.

What Tyco has decided to do, as spokesman Bruce Maguire puts it, "is take a giant step backwards." Let Mattel focus on the speed business so appealing to the older boys; Tyco will reclaim its franchise on the push-around business, Mr. Maguire said. Instead of putting money into ever more fancy Zero G speed tracks for its Matchbox cars, Tyco's building Matchbox playsets for a younger crowd.

Pieced together with track, the playsets, with hospitals, heliports, car washes and parking lots, create a world for Tyco's Matchbox cars.

Tyco decided to get out of some aspects of the toy business. "We de-emphasized certain volatile product categories," Mr. Baughman said.

How does that translate to the toy shelf? No action figures.

In 1994, $949 million worth of action figures -- such as boys' fighting figures -- were sold, up nearly 40 percent from 1993, making them the fastest-growing category, according to the Toy Manufacturers of America.

But action figures "are highly unprofitable," Mr. Baughman said. "You have to invest a lot of money up front. And they are risky."

Instead, Tyco plans to expand its selling stalwarts, including Dr. Dreadful, Magna Doodle, the Kenya doll and the Doodle Bear. And it hopes to build a new core business with its Kitchen Little line -- a collection of sturdy, miniature pots, pans, dishes and play food.

This year, Tyco's putting its money on a $100 video camera for children age 6 and older. Designed to be extra sturdy, its most important function may well be to keep kids away from the $800 model their parents like to play with.

"Coming up with an exciting new product," Mr. Baughman said, "that's the name of the game."

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