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Toys R Us: From Dominance to Bankruptcy

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Toys R Us was once a feared competitor, the top toy retailer in the U.S. with a seemingly unassailable lead as a "category killer" in the toy sector.

20 years later the company filed for bankruptcy due to the loss of vendor support in the months before the 2017 holiday season.

The decline of Toys R Us offers several lessons, foremost among them that no company, regardless of the strength of its position, can afford to be complacent in the face of shifting industry dynamics.

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Toys R Us: From Dominance to Bankruptcy

  1. 1. Toys R Us From Dominance to Bankruptcy April 2018
  2. 2. “All men make mistakes, but a good man yields when he knows his course is wrong, and repairs the evil.The only crime is pride.” ‒ Sophocles,Antigone Abraxas Group LLC 2
  3. 3. • In 1997, Toys R Us was the #1 toy retailer in the U.S., having beaten the other “category killer” specialty retailers and still maintaining a lead over Walmart, Target, and other general retailers. • In September 2017, the company was forced to file for bankruptcy when vendor concerns gave rise to a liquidity crisis. • Today, the company is winding down all U.S. operations. Success to Failure in 20Years Abraxas Group LLC 3
  4. 4. 4Abraxas Group LLC
  5. 5. Revenue Abraxas Group LLC 5 Revenue ($MMs) Country Amount % of Total United States 7,131 61.8% Japan 1,272 11.0% Europe 1,163 10.1% Canada 821 7.1% UK 553 4.8% China and Southeast Asia 375 3.2% Australia 207 1.8% Licensing revenue 18 0.2% Total 11,540 100.0% Breakdown for FY16 $12,361 $11,802 $11,540 FY 14 FY 15 FY 16 Information as of the fiscal year ended January 31, 2017
  6. 6. Domestic & International Breakdown Abraxas Group LLC 6 Domestic International % of sales Information as of the fiscal year ended January 31, 2017
  7. 7. Global Footprint Abraxas Group LLC 7 Store Breakdown for FY ended January 28, 2017 Store Type Domestic International Consolidated Traditional Toy 358 574 932 SBS 212 208 420 Baby 223 14 237 Long-Term Express 48 16 64 Outlet 38 0 38 Total 879 812 1,691 Excluded in Store Count Licensed 0 257 257 Temporary Express 10 29 39 Information as of the fiscal year ended January 31, 2017
  8. 8. Strategy • The company under-invested in ecommerce capability • Management never fully embraced ecommerce, and then omni-channel, as the true future of the company. Leverage Communication • Toys R Us was highly levered • High levels of debt, a result of the 2005 buyout, reduced the company’s ability to invest at a crucial period. • Stakeholders (particularly vendors) panicked • It was clear that the company would need to restructure at some point, and absent clear signals from management, vendors forced the issue. Causes of Failure Abraxas Group LLC 8
  9. 9. Leverage Abraxas Group LLC 9 ($MMs) Facility Amount French real estate credit facility 48 Incremental secured term loan facility, due fiscal 2018 125 Second incremental secured term loan facility, due fiscal 2018 62 7.375% senior notes, due fiscal 2018 209 $1.85 billion secured revolving credit facility, expires fiscal 2019 465 Senior unsecured term loan facility, due fiscal 2019 874 Tranche A-1 loan facility, due fiscal 2019 272 Propco II Mortgage Loan, due fiscal 2019 489 Giraffe Junior Mezzanine Loan, due fiscal 2019 78 Secured term B-4 loan facility, due fiscal 2020 982 UK real estate credit facility, due fiscal 2020 323 Toys-Japan 1.85%-2.18% loans, due fiscals 2019-2021 44 12.000% Taj senior secured notes, due fiscal 2021 577 8.750% debentures, due fiscal 2021 22 Finance obligations associated with capital projects 179 Capital lease and other obligations 12 Total debt 4,761 Less: current portion (119) Total Long-term debt $4,642 Information as of the fiscal year ended January 31, 2017
  10. 10. ▪ Review of the company’s Fixed Charge Coverage Ratio in recent years highlights the strain that a highly leveraged capital structure placed on the company. ▪ In only two years of the last five did the company generate sufficient operating income to fund debt service. Debt Service Abraxas Group LLC 10 Period Ended 1/31/17 1/30/16 1/31/15 2/1/14 2/2/13 Adj. earnings (loss) from continuing operations 628$ 553$ 379$ (150)$ 808$ Fixed Charges Interest expense 457 429 451 524 480 Interest capitalized during period - - - - 1 Interest portion of rental expense 159 166 180 190 235 Total Fixed Charges 616 595 631 714 716 Ratio of Earnings to Fixed Charges 1.02x 0.93x 0.60x (0.21x) 1.13x ($MMs) Information as of the fiscal year ended January 31, 2017
  11. 11. David Johnson Email: david@abraxasgp.com Ph: 312-505-7238 Twitter: @TurnaroundDavid David Johnson, founder and managing partner of Abraxas Group, has a 20- year track record of driving organizational change. David has served as an interim executive or financial advisor to dozens of middle market companies in turnaround and restructuring situations. Throughout his career, David has demonstrated a commitment to thought leadership, with numerous speaking engagements and articles on the topics of change management, performance improvement, restructuring, turnaround, and value creation to his credit. David received his MBA from the University of Chicago and completed his undergraduate studies at Fairleigh Dickinson University. Abraxas Group LLC 11

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