Debts 'R' Us

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Bloomberg writes about the ominous Toys'R'Us debacle:

But what's fascinating -- or unsettling -- is that overall revenue at Toys "R" Us didn't fall all that much, even during and after the recession. In the 12 months leading up to the LBO, the chain generated $11.2 billion of sales, versus $11.1 billion in the 12 months through October 2017, according to data compiled by Bloomberg. The high was $13.9 billion for the year ended January 2012.

The overarching problem was costs -- and importantly, interest expense on borrowings.

Axios investigates the Toys 'R' Us blame game:

There is plenty of blame to go around, including for the private equity firms that bought Toys "R" Us in 2005, the senior lenders who control it now and an increased focus on toys by generalist retailers like Amazon and Wal-Mart.

This reminds me of Mark Dunbar's In These Times piece from last October about how private equity killed the chain:

Since Toys "R" Us filed for Chapter 11 bankruptcy in late September there has been much speculation as to what, or who, is to blame for the iconic toy company's collapse. Some commentators have pointed to a general decline in the toy industry, with kids increasingly preferring app-based digital games to physical ones. Others have cited the company's poorly constructed website and overpriced products, as compared to competitors like Walmart and Amazon.

As the story goes, Toys "R" Us was selling increasingly unpopular products inefficiently and at prices that didn't reflect the current economic landscape. So is it really a surprise that the company was finally forced to file for bankruptcy, potentially closing its 1,600 stores in 38 countries for good?

"Yet most importantly," Dunbar points out, "this analysis fails to account for how Toys "R" Us wound up so deeply in debt in the first place:"

In 2005, as the company's stock was regularly losing value due to mediocre sales, management decided to sell the company in a leveraged buyout to a trio of buyers, real-estate-investment trust Vornado Realty Trust and private equity firms KKR and Bain Capital.

This trio played a critical role in the downfall of Toys "R" Us, through imposing massive debt obligations on the company and requiring it to pay back its debts so that its buyers could turn a profit. Meanwhile, the finances of the company were thrown into disarray and employees were hit with wave after wave of layoffs.

"The pattern followed by Toys 'R' Us is typical in private equity takeovers," he writes as the legacy of Mitt Romney claims another victim:

Management is bought off: John Eyler, CEO of Toys "R" Us, was compensated $65.3 million upon the buyout's completion. Employees have no say in the matter. Then come the layoffs, debt transfers and shortsighted asset sales. Funds are earmarked to pay down debts--Toys "R" Us was spending more annually on debt payments than it was on its website and stores--even as cash reserves are depleted. Before the buyout, Toys R Us had $2.2 billion in reserves. As of 2017, that number is down to $301 million.

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This page contains a single entry by cognitivedissident published on March 15, 2018 1:03 PM.

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