Toys ‘R’ Us Ready to Go Public, Again
The private investors who bought Toys "R" Us in
2005 are ready to take the chain public again.
According to reports, Kohlberg
Kravis Roberts & Co, Bain Capital and Vornado
Realty Trust have hired Goldman Sachs for an initial public offering (IPO) the
companies hope will raise upwards of $1 billion. The companies paid $7.5 billion,
including assumed debt, when they acquired the toy store chain.
An unidentified
source said to be involved in the IPO, told the New York Post, "We
will need calm for a few days before actually going public. This will, though,
be a good harbinger for other private-equity-owned retailers going public."
Private
equity firms, according to a Bloomberg report, are taking companies
public to raise funds to pay down debt and increase profits.
According to the Post,
the key reason behind the Toys "R" Us
IPO is its $5.2 billion debt. The company has reported stronger performance
under CEO Jerry Storch, but the debt load is hampering efforts for the chain
to improve performance.
An unidentified analyst told the Post, said the
IPO is likely "to
attract investors who are looking for something more defensive, with strong
cash flow and dividends."
Discussion Questions: Does Toys "R" Us, with $5.2 billion
in debt, sound like a good bet for investors? How much more or less competitive
will Toys "R" Us
become if it has a successful initial public offering? Strictly from a
retailing standpoint, what must the chain do to build on its most recent
successes?
So they are $5 billion in debt and throwing up their hands saying, “just give us more money, THEN we’ll figure it out”? If it was an independent retailer looking for 1/100th of that they would be laughed out of the bank. On Wall Street they’ll probably be a darling–until they have to answer to stockholders who are at least as picky as moms.
Does the big box format work in toys? It would seem not.
I would stay away from any company that is using debt as a crutch to stay in business. If a company cannot pay off their debt without a public offering, it tells me they can’t stand on their own. I don’t believe there are any successes to build on. Wal-Mart will destroy them on pricing and more convenient locations.
Toys “R” Us has strong brand recognition, a loyal shopping base, and a Millenial Generation that is 70 million+ strong who will produce a good number of babies (think future sales/opportunities).
When consumers respond to the annual BIGresearch Consumer Intentions & Actions (CIA) Survey about “Where do you buy childrens’ toys MOST often,” 35% say the Discount channel (read that as Walmart and Target), and 16% go to Specialty retailers (Toys “R” Us is 15.6%).
The fundamentals are very good for the future, IF Toys “R” Us can execute to meet the consumers’ needs. That will take a public offering and use of cash for the stores. If private equity sends the money to the operations side of the business, as opposed to merely cashing out, the prospects are very good for success.
Consumers responding to the CIA questions rate Toys “R” Us very highly for “selection”, “price”, “good selection of brands”, “quality”, and “location”–much higher than other channels. Their customer base is very loyal, as 80% of their shoppers say they rate them 7 to 10 (10 point scale) as to whether they would recommend the store, vs. just 60% of other channels receiving that kind of recommendation. And, the Toys “R” Us shopper has been frequenting the stores for 10+ years on average vs. competitors that have 8 years of loyalty.
Those shoppers, however, demonstrate their willingness to shop at other channels for ‘second looks’.
Keep the execution on the positive trends, and get private equity to be patient on capturing their return, and you have a winner here.
Obviously, if I had certainty about the answer to this question, I would have long since cashed out on some stocks somewhere, and be on my island permanently….
Still…while I can understand why the equity guys want to do an IPO, it is really hard for me to imagine this as an attractive offering. Low margin business…severe competition from Amazon and Mass Merchants, low barriers to new entrants…probably a torturous trip for parents with their kids (I want, I want, I want). On the plus side, low occupancy costs, high density (to facilitate advertising)….
On measure, I don’t get it.
The only people who will make money from a deal like this are the investment bankers, the lawyers, the private equity firms, and the preferred investors. Anyone else who buys stock after the IPO absolutely CAN’T make money. Ever!
Walk, don’t run, from this deal.
Toys “R” Us has become a stronger, more focused business under its new leadership. It is also important to recognize that TRU includes Babies “R” Us, which performed well even during the difficult times. Further, the combination of TRU and BRU (the Superstore) is a real winner from both a customer and bottom line perspective. More recently management has shown its creativity and excellent follow-through with its successful ‘pop-up’ stores.
The IPO will put the Balance Sheet back in balance and allow the company the flexibility to grow and prosper. I see this as a potentially terrific investment.
This is a bad KKR deal. Lot’s of debt, poor performance, poor management. If the company was successful, they would be opening their books and sharing the information, and potential investors in the IPO would be comparing a winning company against the old losing company. Not so. Stay away from this IPO.
“We will need calm for a few days before actually going public.”
What is this, an IPO or a seance? (It’s even wrong to even call it an INITIAL offering, it’s actually a post bankruptcy/secondary one…SPO?) Anyway, some weeks ago we were “treated” to the sight of a (presumably) chastened Tiger Woods staring at the camera while a God-like voice intoned “What have you learned?” I’d like to put the TRU giraffe before the camera and ask the same question: you nearly went el Foldo before because your stores were cluttered and you couldn’t compete with Walmart and Target on price…so what’s changed?
Do I still wish them well anyway? Sure (and they’ll need it too.)
TRU has suffered on two fronts over the last 10 or so years. Firstly, there have simply been fewer babies being born. Post Gen Y birth rates in the United States have been low and while ethnic birth rates have carried population growth, this is not TRU’s core customer. Secondly, Wal-Mart has been eating their lunch on any comparable item rendering the category comoditized.
There is a bright spot however on the horizon for TRU. The 2010 census data will show a record (and growing) number of grandparents in America, which is likely to swell more over the next 10 years. The same applies to Canada. And keep in mind, this will be the wealthiest generation of grandparents in history.
Consequently, grandchildren are likely to be lavished like never before.
If TRU can capture the momentum of this demographic windfall and create a toy-buying experience that grandparents can share with their grandchildren and prefer to discount options, then I think there’s hope.
If on the other hand they choose to do nothing and simply play hardball with Wal-Mart and other discounters, I don’t see much future–at least not in their current box format.
Heavy debt. Asking for more money. And using the money to face off against the two 800 pound gorilla’s…Walmart and Target. The toy industry has been consolidating for several years. I wish them luck.