Toys R Us, gearing up for a competitive holiday season, has waived the service fee and minimum purchase requirements for its layaway service.

Yet the bigger challenge that the 875-store chain faces is overcoming the negative perceptions of some customers. My wife and I find our local Toys R Us to be dank and depressing where service is hit or miss. Friends of mine have had similar experiences, and reviewers have described some stores as "filthy" and a "layout nightmare."

Store appearances and customer service are critical for Toys R Us, particularly as competition heats up from larger rivals such as Wal-Mart (WMT), Target (TGT) and Amazon (AMZN).   

Katelyn Leondi, a company spokeswoman, said it would be unfair of me to make generalizations about the chain based on my limited experience, especially considering that I haven't seen any stores the chain has recently remodeled. Since 2006, the company has begun integrating smaller Babies R Us stores in Toys R Us locations. By the end of the year., the company expects to operate 204 "side-by-side" locations in the U.S., accounting for 25% of its store base.

Needham & Co. analyst Sean McGowen told MSN Money that the remodeled stores look much better than they did previously.

"The contrast is striking," he said. He described the new appearances as cleaner and brighter. "The inventory is just fresher."

The company has been struggling for years and was taken private in 2005. It reported a net loss of $60 million in the first quarter, a slight improvement from a year earlier. Net sales slumped 0.9% to $2.6 billion, while comparable sales, a key retail metric, fell 0.8% domestically and 5% internationally. Even so, this performance marks an improvement from previous years, though it lags the company's own ambitious expectations, according to McGowen.

"They are holding their own in terms of market share," he said. "They are a well-performing company in a struggling industry with really tough competition."
 
Toys R Us doesn't have an easy road ahead, but the fact that it has bricks-and-mortar locations could be an asset. Showing children pictures of toys on a website just doesn't get the same response or sparkle in the eyes as when they hold them in person.

--Jonathan Berr is long Target and Wal-Mart.   Follow him on Twitter@jdberr.
 
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