Zacks_Analysts' Blog : Vornado's 4Q Share of Toys 'R' Us - Analyst Blog

Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), has recently announced its share of third quarter 2011 financial results of Toys ‘R’ Us – a leading global retailer of dedicated toys and baby products. Vornado Realty, which currently owns about 32.7% of Toys ‘R’ Us, will record its share when it reports its results for the fourth quarter ending December 31, 2011.

Vornado Realty’s fourth quarter 2011 will include a loss of $32.3 million or 16 cents per share on account of Toys ‘R’ Us compared to a loss of $30.7 million or 15 cents per share in the year-earlier quarter.

The business of Toys ‘R’ Us is highly seasonal with the fourth quarter accounting for over 80% of the fiscal net income, primarily on strong holiday sales. For the quarter ended October 29, 2011, Toys ‘R’ Us reported net sales of $2.70 billion compared to $2.72 billion in the year-ago quarter. Same-store sales for the reported quarter dipped 2.2% in the U.S. and 3.9% internationally.

By product categories, the Learning and Core Toy division generated strong performance with net sales rising 3.8% and 2.7%, respectively, while that of the Entertainment division, which includes videogame hardware and software, slid 14.5%. Gross margin for the reported quarter increased marginally to 36.5% from 36.3% in the year-ago period.

In accordance with the third quarter results of Toys ‘R’ Us, Vornado Realty will record a negative FFO (fund from operations) before income taxes of $45.3 million or 22 cents per share during fourth quarter 2011 compared to a negative FFO of $57.3 million or 28 cents in the year-ago quarter. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

New York-based Vornado Realty is engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us.

Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The company also has a healthy balance sheet and adequate liquidity.

We maintain our long-term ‘Neutral’ rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for Boston Properties Inc. (BXP), a competitor of Vornado Realty.