Toys"R"Us Annual Report 2002

Our Babies"R"Us division reported 12% net sales growth for the full year, primarily driven by the opening of 19 new Babies"R"Us stores in the United States this year. This division reported a 2% increase in comparable store sales for the fourth quarter and a 3% increase for the full year. A variety of initiatives helped to drive sales and guest traffic, including the rollout of extended apparel sizing to all stores and the addition of in-store photo studios in 21 Babies"R"Us stores.

Toysrus.com reported a net sales increase of 11% for the fourth quarter and 23% for the full year. Growth in the on-line toy business and the Babiesrus.com (baby products), Imaginarium.com (learning products) and the new Giftsrus.com (personalized gifts) on-line stores were factors in the sales performance of Toysrus.com.

We record the costs associated with operating our distribution network as a part of selling, general and administrative expenses (SG&A), including those costs that primarily relate to moving merchandise from distribution centers to stores. Therefore, our consolidated gross margin may not be comparable to some other retailers which include similar costs in their cost of sales. Our consolidated gross margin, as a percentage of sales, increased by 0.4% for the fourth quarter and was flat at 31.0% for the full year. Our consolidated gross margin for the fourth quarter of 2001 included $27 million of store closing markdowns, which were recorded as part of the restructuring and other charges announced in January 2002. Credits and allowances from vendors, which are netted against our cost of sales, have a positive impact on our consolidated gross margin. These credits and allowances increased our consolidated gross margin by 0.4% for the year, primarily in support of our increased promotional activities. Our U.S. toy store division reported a 0.7% decline in gross margin for the fourth quarter and a 0.8% decline for the full year. These declines were primarily attributed to the impact of increased promotional activity, such as our "Low Price Super Stars" pricing campaign, as well as the impact of higher markdowns recorded to keep our inventories fresh. Our International toy store division reported a 0.3% increase in gross margin to 32.2% for the year, primarily due to our continued emphasis on exclusive products which carry higher margins. Our Babies"R"Us division reported a 1.0% improvement in gross margin to 36.0%, primarily due to a shift in sales mix to higher margin import product. Gross margin for Toysrus.com improved 2.7% to 24.8%, reflecting an ongoing mix shift toward higher margin juvenile and learning products, as well as lower markdowns due to decreased inventory levels this year.

Our consolidated SG&A, as a percentage of net sales, increased 0.3% to 18.3% for the fourth quarter of 2002. This increase was primarily due to an increase in net advertising expense as a result of our decision to defer certain of our advertising activities to this year's fourth quarter. Our consolidated SG&A, as a percentage of sales, decreased 0.7% to 24.0% for the full year, primarily as a result of our continued focus on expense control. During 2002, we implemented shared services in a variety of functional groups, which, along with other efforts, helped us to achieve the overall reduction in SG&A as a percentage of sales. Advertising allowances, which are netted against


	RESULTS OF OPERATIONS Comparison of Fiscal Year 2002 to 2001 We reported consolidated net sales of $11.3 billion for the 52-week fiscal year ended February 1, 2003 versus $11.0 billion for the 52-week fiscal year ended February 2, 2002, or a 3% increase in consolidated net sales. Our consolidated net sales were $11.2 billion for 2002, after excluding the impact of foreign currency translation, representing a 1% increase over 2001 net sales. Total enterprise sales consist of all Toys"R"Us branded net sales from all of our stores and from our internet businesses, and the net sales from international licensed and franchised stores. We believe that enterprise sales are useful in analyzing the worldwide strength of our family of brands: Our consolidated comparable store sales, in local currencies, were flat for the fourth quarter and the fiscal year. Comparable store sales for our U.S. toy store division declined 1% for both the fourth quarter and the full year. Video game sales, which include sales of video hardware, software and accessories, were the primary factor contributing to these decreases. The video game category posted an 18% decline for the fourth quarter and a 13% decline for the year. The introduction of three video platforms (X-Box, Gamecube and Gameboy Advance) drove strong video sales in 2001. The performance of the video game category was also negatively impacted by significant reductions in the retail prices of video game platforms this year, such as the reduction in retail price from $299 to $199 for X-Box and PlayStation 2, and a reduction in retail price from $199 to $149 for Gamecube. Video game sales accounted for approximately 19% of our total U.S. toy store sales, excluding apparel sales, in the fourth quarter of 2002, down from 22% in 2001. Juvenile product sales in our U.S. toy stores declined 8% for the full year, mainly due to a shift of some sales to Babies"R"Us stores in the same markets. However, our core toy sales, which include boys and girls, learning and preschool toy categories, increased 3% in 2002. Our International division reported comparable toy store sales increases, in local currencies, of 5% for the fourth quarter and 6% for the full year. These increases were primarily driven by the strong performance of our toy stores in the United Kingdom and Spain. We continued to expand the presence of in-store shops, such as Universe of Imagination (learning and educational products), Animal Alley (plush), Teentronics (electronic entertainment products) and Babies"R"Us (newborn and infant products). In addition, the penetration of exclusive products in the International division continues to grow, and, as a result, contributed to the improvement of our gross margin in this division.		Our Babies"R"Us division reported 12% net sales growth for the full year, primarily driven by the opening of 19 new Babies"R"Us stores in the United States this year. This division reported a 2% increase in comparable store sales for the fourth quarter and a 3% increase for the full year. A variety of initiatives helped to drive sales and guest traffic, including the rollout of extended apparel sizing to all stores and the addition of in-store photo studios in 21 Babies"R"Us stores. Toysrus.com reported a net sales increase of 11% for the fourth quarter and 23% for the full year. Growth in the on-line toy business and the Babiesrus.com (baby products), Imaginarium.com (learning products) and the new Giftsrus.com (personalized gifts) on-line stores were factors in the sales performance of Toysrus.com. We record the costs associated with operating our distribution network as a part of selling, general and administrative expenses (SG&A), including those costs that primarily relate to moving merchandise from distribution centers to stores. Therefore, our consolidated gross margin may not be comparable to some other retailers which include similar costs in their cost of sales. Our consolidated gross margin, as a percentage of sales, increased by 0.4% for the fourth quarter and was flat at 31.0% for the full year. Our consolidated gross margin for the fourth quarter of 2001 included $27 million of store closing markdowns, which were recorded as part of the restructuring and other charges announced in January 2002. Credits and allowances from vendors, which are netted against our cost of sales, have a positive impact on our consolidated gross margin. These credits and allowances increased our consolidated gross margin by 0.4% for the year, primarily in support of our increased promotional activities. Our U.S. toy store division reported a 0.7% decline in gross margin for the fourth quarter and a 0.8% decline for the full year. These declines were primarily attributed to the impact of increased promotional activity, such as our "Low Price Super Stars" pricing campaign, as well as the impact of higher markdowns recorded to keep our inventories fresh. Our International toy store division reported a 0.3% increase in gross margin to 32.2% for the year, primarily due to our continued emphasis on exclusive products which carry higher margins. Our Babies"R"Us division reported a 1.0% improvement in gross margin to 36.0%, primarily due to a shift in sales mix to higher margin import product. Gross margin for Toysrus.com improved 2.7% to 24.8%, reflecting an ongoing mix shift toward higher margin juvenile and learning products, as well as lower markdowns due to decreased inventory levels this year. Our consolidated SG&A, as a percentage of net sales, increased 0.3% to 18.3% for the fourth quarter of 2002. This increase was primarily due to an increase in net advertising expense as a result of our decision to defer certain of our advertising activities to this year's fourth quarter. Our consolidated SG&A, as a percentage of sales, decreased 0.7% to 24.0% for the full year, primarily as a result of our continued focus on expense control. During 2002, we implemented shared services in a variety of functional groups, which, along with other efforts, helped us to achieve the overall reduction in SG&A as a percentage of sales. Advertising allowances, which are netted against