Kids rule the aisles while parents tag along for the ride at Toys "R" Us. The company is one of the world's largest toy retailers, but in the US it has lost its top position to retailing behemoth Wal-Mart. Toys "R" Us sells its wares in more than 1,575 stores worldwide, as well as online. In addition to about 865 US Toys "R" Us and Babies "R" Us stores, the retailer operates more than 400 side-by-side stores, which sell both toys and juvenile products, 245 juvenile stores, and about 265 Express stores. Toys "R" Us is privately held by investment companies KKR and Bain Capital and real estate firm Vornado Realty Trust. In 2013 the company finally withdrew its IPO filed back in 2010.
The offering sat in the IPO pipeline for almost three years. Despite an impressive turnaround as a private company under CEO Jerry Storch, the wild swings in the stock market and fear of another recession finally spurred the company to formally withdraw the offering in March 2013. More fundamentally, the toy seller's sales growth has stalled and competition has increased, which ultimately conspired to doom its IPO prospects. Toys "R" Us was taken private in 2005 by a private equity group for $6.6 billion.
Toys "R" Us operates in the US (including Puerto Rico), which accounts for 60% of its sales, as well as Japan, Europe (including Germany, Austria, Switzerland, France, Spain, Portugal, and Poland), Canada, the UK, Australia, China, and Southeast Asia.
With more than 700 international stores and some 185 licensed stores in 35 countries in Asia, Europe, and the Middle East, Toys "R" Us International contributes 40% of its US-based parent company's sales. Japan, the UK, and Canada are its largest foreign markets, accounting for about half of its international store presence. The toy retailer first ventured overseas in 1984.
As part of its business, Toys "R" Us operates through a pair of segments: Toys "R" Us Domestic and Toys "R" Us International. Its domestic segment focuses on selling products in the core toy, juvenile (including baby), learning, and seasonal categories through about 875 stores that operate in 49 states in the US and Puerto Rico, as well as the Internet. The company's international segment peddles the same product categories through 665 operated and 185 licensed stores in 35 countries and jurisdictions and through the Internet.
Some of its subsidiaries include Toys "R" Us Properties (UK) Limited; Toys "R" US Europe, LLC; and Toys "R" Us Australia Holdings, LLC.
The toy maker and marketer's business is supported by 20 distribution centers: 10 devoted to domestic operations and 10 focused on international operations (excluding licensed business). To managed the delivery of inventory from the company's distribution centers to its stores, Toys "R" Us in 2012 inked a deal with third party logistics providers JB Hunt Transport and Performance Team Freight Systems.
The toy company's sales declined by $1 billion (7%) in fiscal 2014 (ended January) versus the prior year, to $12.5 billion, and the company posted its biggest loss in nearly 30 years. Foreign currency translation decreased net sales by $329 million. The rest of the decline was attributed to a decrease in same-store sales, partially offset by an increase in net sales from new store openings outside the US. Domestic and international same-store sales (stores that have been open for at least 56 weeks) declined by 5% and 3%, respectively in fiscal 2014, and the company has posted negative comparable sales comparisons for several consecutive years. The retailr reported soft sales in its juvenile (including baby), entertainment, and learning categories. Infant care products, video game software, educational electronics, and construction toys all performed poorly.
Toys "R" Us posted a net loss of $1 billion for fiscal 2014 (ended January), compared to net earnings of $38 million for the prior year. The company blamed the loss primarily on a decrease in gross margin dollars, an impairment to goodwill, and an increase in income tax expense. Cash flow from operations declined to $144 million from $537 million in the prior year primarily due to declining sales. The decrease was partially offset by the timing of vendor payments. Debt has climbed to more than eight times cash flow, up from 5.3 times a year ago. (The company had looked to its shelved IPO to cut debt.)
As one of the last big toy retailers, Toys "R" Us is grappling with how to grow its business amid a weak selling environment for specialty retailers and reverse last year's billion-dollar loss. The toy chain competes with Wal-Mart Stores and Target, which both lure shoppers with groceries and other basics. Furthermore, its breath of selection is being challenged by online giant Amazon.com.
The company's retail operations include its main chain of Toys "R" Us stores, the Babies "R" Us chain, and side-by-side (SBS) stores, which combine Toys "R" Us stores and Babies "R" Us stores merchandise under one roof. The retailer's "juvenile integration" strategy seeks to boost sales and profits by offering customers "one-stop shopping" by building new SBS stores and converting existing stores to the hybrid format. The company also owns famed upscale toy emporium FAO Schwarz (acquired in 2009), which operates a landmark store in New York City. Online offerings include Toysrus.com and Babiesrus.com, as well as etoys.com, a seller of toys and juvenile products. The Toys.com (acquired in 2009) Internet domain redirects customers to the company's toy chest of e-commerce sites. The firm also owns the KB Toys brand and e-commerce site, which also directs online shoppers to its other sites.
The IPO was meant to underscore the impressive turnaround at the once-troubled toy retailer. Indeed, under CEO Storch, the former vice chairman of Target who joined the company in 2006, Toys "R" Us made a concerted effort to clean up its stores and reduce clutter to make shopping easier and more enjoyable. To that end, Storch has focused on making Toys "R" Us a leaner, more efficient retailer. The toy seller has emphasized customer service and stocked up on top-selling and proprietary items (like special Barbie dolls available only at its stores) for its busy holiday seasons. Storch also improved relations with key manufacturers, such as Mattel and Hasbro. (The company has some vendor relationships with some 3,700 manufacturers and importers.) In sum, Toys "R" Us has been transformed from a chaotic warehouse full of cheap, mass-market toys (that were often out of stock), to a cleaner and leaner, customer friendly purveyor of top-selling and proprietary toys and juvenile merchandise. Nevertheless, it still faces declining sales and fierce competition.