Toys R Us is discovering that competing against Wal-Mart on price is a losing proposition:

Same-store sales at the company's U.S. Toy Store division fell 1 percent for the year and the fourth quarter of 2002 despite Toys "R" Us' heavy promotion of its "Low Price Superstar campaign" over the holiday season, as lower prices from discount chains Wal-Mart and Target continue to lure away customers.

"We were outpriced by our competitors 12-to-1," said Eyler. "As toy specialists, we have to offset [Wal-Mart's] pounding down of prices. We've identified two ways to do this. We have to align our prices more sharply with them and make it more fun to shop with us."

The latter strategy holds a lot more promise. Wal-Mart will always be able to undercut you on price. But shopping at Wal-Mart is not the most exciting experience.