For nearly two years, Toys “R” Us has waited for the right moment to take itself public.
That moment might be slipping away.
The company is facing management defections, a decline in same-store sales and relentless competition from Walmart and Amazon. Last month, Moody’s Investors Service put a negative watch on the company’s debt.
With more than 1,500 stores worldwide, Toys “R” Us is part of a group of big, lumbering retailers trying to reinvent their businesses for a new era.
Sears is trying to turn around sales declines through customised offers to customers, in-store technology and an online push. Best Buy is adding small stores to balance its big-box ones. J C Penney is creating stores-within-a-store to give shoppers more variety.
And Toys “R” Us, the last of the big toy stores, is grappling with how to grow.
The company was bought in 2005 by a private equity group for $6.6 billion. By May 2010, when it filed for an initial public offering, its chief executive, Gerald L. Storch, seemed to have turned the once-struggling company around.
But today, the toy story isn’t quite as cheerful.
After a lackluster holiday season, Toys “R” Us’s domestic sales in 2011 were below what they were in 2008, one of the worst Christmases for retailers in recent memory.
Sales at stores open at least a year, a measure of continuing demand, dropped internationally and domestically in 2011. Earnings, by one measure, fell five per cent from 2010 to 2011 after falling about 11 percent the previous year.
Management is churning as dissatisfaction deepens. The president of Toys “R” Us United States resigned in February after only 10 months, despite having signed a one-year contract. Earlier this year, the heads of both merchandising and administration left. The group of executives leading Toys “R” Us has experienced turnover in each of the seven years that Toys “R” Us has filed annual regulatory statements under Mr Storch.
Amid these challenges, Toys “R” Us’s owners — two private equity giants, Kohlberg Kravis Roberts and Bain Capital, and the real estate developer Vornado Realty Trust — are facing the possibility that the window for an IPO has closed, according to two people involved in the deal.
In 2011, because of stock market volatility, numerous offerings were delayed or cancelled. The retailers that had successful IPO’s last year were fast-growing companies like Michael Kors and Prada. Giant, slow-growth or no-growth chains might not have as much appeal.
“Since they announced the IPO in May of 2010, the operating performance has weakened,” said Charles O’Shea, an analyst at Moody’s.
An offering would improve the company’s debt-heavy balance sheet and give the owners a means to start cashing out of their investment, which private equity companies usually try to do after three to five years. It has been seven years since they bought Toys “R” Us.
“This is a very crucial year for Jerry Storch and Toys “R” Us — there have been expectations for them going public, and it hasn’t happened yet,” said Jim Silver, editor of TimetoPlayMag.com and an influential toy industry expert. “They need to come back.”
Retailers were popular targets of private equity firms during the leveraged buyout boom of 2005-7. Companies including Lord & Taylor, Neiman Marcus and Michaels Stores fell into private hands.
In Toys “R” Us, the buyers saw an ailing franchise that was ripe for improvement and owned valuable real estate.
The company was founded in 1948 and went public in 1978. But by 2005, Walmart and Target had cut prices on toys to the point that other toy retailers went out of business. Toys “R” Us said it would seek a buyer.
The new private equity firms installed Mr Storch, a former executive for McKinsey and Target, as chief executive.
His strategies included increasing private labels and exclusive toys at the retailer. The company bought the rights to the defunct KB Toys and eToys brands, as well as FAO Schwarz, adding FAO — branded toys to its regular stores.
“That now represents more than 50 per cent of their toy sales, and it insulates them from competition,” Lutz Muller, an analyst at Klosters Trading, said of the exclusive and private label products.
The company has also converted a quarter of its locations into combined Toys “R” Us and Babies “R” Us stores and plans to continue the makeovers, saying in a filing that they seem to be generating sales gains.
It added stores internationally, although international same-store sales have declined for the last three years. And it has pushed Internet sales, saying they grew 50 per cent last Christmas versus the previous holiday season.
But the competitive pressures facing Toys “R” Us are stiffer than ever.
Over the holiday season, Walmart offered layaway on toys, which drew shoppers, while Amazon continued to slash prices. “It was clear that it was a very competitive year in the toy business,” Storch said in an interview. “It’s also very clear we held on very well.”
A major challenge has been a sharp reversal in video game sales. Once an area of growth, thanks to Nintendo Wii and other consoles, they have fallen as children move to iPhone games and apps for iPads. Last year, about eight per cent of Toys “R” Us’s business was in video game sales, down from 11 percent in 2009. (The company’s fiscal 2011 ended January 28, 2012.)
Its newborn category — staples like diapers and formula — also dropped, which the company said was because of a lower birthrate. Another factor was Amazon’s aggressive entry into the baby category with its 2010 acquisition of Diapers.com.
Toys “R” Us made a misstep when it added too many pop-up stores — around 600 in 2010 — to serve holiday demand, said O’Shea, the Moody’s analyst. It is still dealing with “hangover costs” from that effort, he said.
In March, Moody’s lowered the outlook on Toys “R” Us from stable to negative, and Gimme Credit, a research firm focusing on corporate bonds, lowered its rating on Toys “R” Us’s debt from outperform to underperform.
Thanks in large part to the private equity firms’ leveraged buyout to acquire Toys “R” Us, it labors under $5.2 billion of debt, $1.4 billion of which comes due in 2013.
Last week, Toys “R” Us tapped the red-hot market for corporate debt markets by raising a $225 million loan that does not mature until 2018. It is expected to use these proceeds to pay off some debt that matures next year.
Yet Thomas C. Ferguson, an analyst at KDP Investment Advisors, said Toys “R” Us’s weak financial results could hinder its ability to further restructure and push back its debt maturities.
About a year after Storch arrived at Toys “R” Us, a company newsletter profiled three senior executives — two of whom have since left — and repeated some words of advice the chief executive had given upon joining.
“Our competition is good, but we can’t blame them. We are not victims! Our fate is in our own hands!”
©2012 The New York Times News Service