A year in review
2002 was a year of encouraging progress, but a time of disappointments as well. Three divisions in our portfolio of businesses - Babies"R"Us, Toys"R"Us International and Toysrus.com - enjoyed the best performances in their history. Those results, coupled with improved expense discipline resulted in a 19% gain in net earnings, before restructuring and other charges in 2001, for Toys"R"Us, Inc. However, weaker results in Toys"R"Us U.S. and Kids"R"Us were very disappointing, despite progress in strategic execution in both divisions.

The performance of our U.S. toy stores did not meet our expectations. Our comparable store sales declined 1% for the year and, in a difficult retail environment, our operating earnings declined as well.

Nonetheless, we were encouraged by the progress we made in the execution of our strategy; which we believe further strengthened our ability to improve our performance in 2003 and beyond. For example, by working closely with our vendors last year, we gained market share in core toy, defined as the Boys and Girls, Learning (i.e. Imaginarium) and Preschool categories. Our core toy sales outpaced toy industry performance, as reported by the Toy Industry Association, by 4% for the year.

We continued to improve our in-stock position, content, presentation and service levels. In addition, we experienced significant improvements in customer satisfaction scores related to pricing and value perception. Both messages were effectively reinforced through our award-winning television commercials featuring our charismatic "spokesanimal," Geoffrey the Giraffe.

We enjoyed historically high levels of success in several of our divisions in 2002. Babies"R"Us and Toys"R"Us International both turned in record-setting operating earnings for the fourth quarter and full year of 2002. In addition, Toysrus.com achieved operating profitability in the fourth quarter - a full year ahead of schedule. Our Kids"R"Us division has been struggling in its stand-alone stores for some time now, but we have seen positive results from sourcing apparel through Kids"R"Us for our Babies"R"Us stores as well as our Toys"R"Us/Kids"R"Us combo stores. Currently, our total apparel business represents approximately $900 million in sales per year, at above company average profit margins, and we expect continued growth. Approximately 65% of these sales come from exclusive products that generate higher margins than nationally branded items. We'll talk about these divisions in greater detail in this report.