Toys ‘R’ US – Six Months To a Slow Death of a Business – #18

Simply put, the liquidation of Toys ‘R’ Us can be blamed on Management which reflects a degree of inability to manage a business along with a lack of industry knowledge, high evidence of incompetency and clear indication of total disregard for Customers, employees, stockholders and suppliers who extended credit and needed TRU to stay in business. Management made out alright because as always they cared for themselves.

Toys‘R’Us was a victim of “zero” Management; no planning; inventories out of control; outdated stores; no awareness of demographic shifts as they affected Toy purchases; no evidence of recognizing the growth of e-commerce and on-line shopping; the shift to big box stores such as Amazon, Walmart and Target who were adopting specific strategies regarding selling toys on-line and in-store. Yet Toys ‘R’ Us managed to survive for 70 years – I assume they had success due to growth of children during this period, and the fact that they treated their employees fairly – they simply kept the employees happy and kept them in the dark regarding company deals in selling the company and other operational challenges. I always wondered why 33M employees in the U.S. wouldn’t be asking answers from Management about the fact that it is cheaper and convenient to buy Toys on-line. I’ll bet that many of these 33M
employees were not informing their Managements about the shifts that they were aware of as Customers. They were fat-and-happy believing that the good times will keep on rolling while their kids were busy with a new toy – the smart phone – and the parents were ordering toys on their kids smart phones. Why wouldn’t Toy’s ‘R’ Us have at least established a powerful e-commmerce presence?

The employees were like the Kodak folks making roll film, but when asked how many were using digital cameras, the answer was above 50%. They too were fat-and-happy and cashing their weekly check without saying a word – this was a great job – it seemed like it would go on forever. However, this was not the case either at Toys”R”Us nor Kodak, nor will it be in any business situation!

History of a 70yr. Success Story

Charles Lazarus a WWII veteran in 1948 had the vision to see the need for a children’s furniture store, and opened one in Washington D.C.. Since he was a visionary, he used Demographics to develop a plan that was aimed at a market segment called the postwar baby boom era. Not only did he prioritize selling baby furniture, but he added toys to the store which was called Children’s Bargain Town.

In 1957 he started Toys ‘R’ Us modeling the initial design after super-markets with a wide variety of toys and shopping carts. One of success factors that he accomplished was to be a leader in the brand movement in that he simply reversed the ‘R’ in the name and added a Star inside or outside the ‘R’ – he also added colors (red, blue, orange and green) to highlight the Brand – that brand has survived for 60+ years, what a brilliant move – the brand had key ingredients of visibility, described the business, easy to adapt internationally and flexible to change, yet not lose power of the brand like – Baby’s ‘R’ Us. (The establishment of a brand is vital – we plan to cover the subject in future BLOGS.)

At this point we will need your help. Can someone provide some info on Mr. Lazarus? In 1966, Did Mr. Lazarus experience business problems or did he simply want out when he sold the Company to retail conglomerate Interstate Stores, and it took them until 1974 to recognize how hard it is to bring to market a dedicated product focus within an organization that has a multi-product retail focus. They declared bankruptcy and sought protection under the law. Four years later the company emerged out of bankruptcy with Mr. Lazarus back at the helm. Under his leadership the company went public in the 1980’s and they opened hundreds of stores.

In 1996 the company was sold to Baine Capital, KKR&CO, Vornado Realty as a leveraged buyout for $6.6BB of debt which was transferred to Toys ‘R’ Us. How much interest had to be paid on this debt – TRU was saddled with interest payments – let alone repayment of debt. Mr. Lazarus could read the tea leaves well – get out at the top of the leveraged buy-out craze. Now you were adding to additional financial burdens at TRU – at the time of liquidation the debt was still $5BB – is it any wonder? Please, please don’t surrender to any financial groups or Hedge Funds who appear like angels that will save you – they won’t! The best thing you can do is to run your business making a profit and while doing that, make sure that you are taking care of your Customers, employees, suppliers, investors, management, and in so doing you keep a close measurement of growth on an annual basis, because without growth you are stagnating and eventually it will catch-up to any business.

Five companies decided the fate of Toys ‘R’ Us

Amongst the five companies they had a Judas in their midst whose mission was not to save Toys ‘R’ Us, but to work towards a liquidation in order to capitalize on their standing as the leading creditor be paid on the priority list of debt payments. Judas was called Solus a HEDGE FUND that only invested $31MM at the time of the bankruptcy filing on September 15, 2017 ($.50 for every $1.00 of value). This loan was made for what is known as debtor-in- position financing, which kept (TRU) operating last Christmas, money that under bankruptcy is first in line to get paid. Shelves were loaded for Christmas with new and in-demand goods, Solus was counting to be first in line for payment, but Christmas fell below the 40% of annual sales estimate. The suppliers were threatening total withdrawal and got some relief when (TRU) was able to get some more loan money to pay current bills. From all accounts, things were going well along the lines of staying alive and reorganizing, and Solus was extremely happy as their investments were on the top of the list and amounted to $211MM at the time of liquidation. Management was keeping the employees in the dark during this six month period, and on December 2017 a judge approved millions in incentive bonuses to top Management. Top Management scurried off the ship like Rats with bonuses in hand. This was happening while employees were being lied to in terms of being promised 2 months complete severance funds in those areas being shut down – on March 15, 2018 all severance payments were cancelled. The following represents some interesting questions and representation of facts:

  • Where was Management? Yes, they were meeting twice a week, but couldn’t they have worked with creditors to restructure the total debt – secured debt was only $668MM of the total $5BB – they all stood to lose a lot of money – as it was, the suppliers on the priority list only received $.22 on each dollar.
  • The reason for sudden liquidation was that Solus was pushing hard for selfish reasons. They were like hyenas ready to pounce and strip the heart out of the dying animal. To a surprised Management team they (Five Major Investors) issued an ultimatum on March 5th that (TRU) had a week on an extended waiver that was due at the beginning of March. (TRU) faced a demand by this group that they stop paying all suppliers of merchandise and landlords the rent. The remaining four joined Solus, versus them wanting to stay and keep working on restructuring just a few days ago. When one of them resisted, Solus bought out their investment interest in (TRU). To add insult to the way Solus operated they hedged $25MM against their original $31MM investment on September 15, 2017 – they already knew exactly what their plan was for (TRU).

In an article appearing in WSJ on April14th, the founder of MGA Entertainment and BRETZ dolls was making a bid of $675MM for U.S. and $215MM for Canadian operations. He was backed by Bank of America and the UBS Group. What happened to the offer? Isacc Larian even sent in a deposit check! This offer just disappeared off the radar. The rest of the industry didn’t like the fact that another competitor was about to be created. Yet, if asked, “nobody wants to see the World without a Toys ‘R’ Us” –what a bunch of useless words?

Hasbro, Mattel and Lego – each were facing losses in 2018 & 19 if TOYS ‘R’ US their largest Customer failed. Why wouldn’t Management approach them to work out a solution? Maybe they did quietly and determined that Toys‘R’Us was too far gone?