Toys R Us – The Retail Growth Story Of The Next 5 Years?
One of the little reported facts pertinent to the media circus recently surrounding Toys R Us’ bankruptcy filing is that the companies over reported debt pile was primarily due to the ‘leveraged’ purchase of the business by investment firms. I am no financial guru, but as I understand it, the system we work in allows buyers to buy an asset i.e. a retailer like Toys R Us mostly via loans/financing secured by/put against the business itself.
I’m not going to pontificate about the rights or wrongs of this – reality speaks for itself. There are several notable examples of this type of transaction working (or at least not killing the business in question), but in the end the benefiting party is most likely to be the owners who risk the business itself to pay off the loans. The business is then saddled with significant interest fees & repayment fees which can’t fail but to constrain development of the business.
Frankly, this is one of the most infuriatingly under reported aspects of Toys R Us’ tribulations – the underlying business is sound! Reporting an operating profit of $460m and EBITDA of nearly $800m in the last full reported financial year. Interest paid in the same financial year = $457m (!).
So to be categorically clear – there is nothing fundamentally wrong with this business! This is a business generating significant positive cashflow aside from the debt used to purchase it.
(please can any one of the hundreds of journalists who have covered this story with apocalyptic doom & gloom in the last few weeks please advise if I have missed anything fundamental here, or failed to read the financial results properly?)
I’d like to highlight the positives of the situation from the toy industry’s perspective and highlight why I believe TRU could become the growth story of the next 5-10 years in toy retailing:
Firstly, there is one positive reality likely to come directly from the TRU bankruptcy filing – the company is generally expected to emerge from Chapter 11 with significantly reduced borrowing, and therefore much less of a millstone around the neck of this toy industry flagship retailer.
Secondly, this will free up money to invest in the refurbishment of stores and growth plan.
Thirdly, the support of toy companies has been almost unprecedently loud and vociferous. Toys R Us is definitely ‘too big to fail’ as far as the major toy companies are concerned – therefore the company has much goodwill in terms of suppliers offering support of all kinds.
Fourthly, once the long term future & security of TRU is confirmed post Chapter 11, it should prove easier to expand further the global footprint.
Overall, the toy industry has shown it is unwilling to let TRU go to the wall. There aren’t many retailers which enjoy such nearly unconditional support. Viva Toys R Us!
by Steve Reece, CEO of Kids Brand Insight www.KidsBrandInsight.com, a leading toy expert consultancy to toy companies around the world, which helps people & companies to get ahead in the toy industry, find the right toy & game factories and to consumer research test their products with kids and parents. Steve also advises investment companies via leading expert networks like Gerson Lehrman (Steve is an acnowledged GLG toy expert).