Toys "R" Us' IPO: The Good, The Bad and The Ugly
The recent public filing Toys "R" Us made for its planned $800 million initial public offering gives a glimpse into the progress the toy-selling giant has made since it went private five years ago. The 1,500-store company has improved in some aspects, but still isn't exactly a hot offering.
Here's a look at what's improved and what's still troubling about Toys "R" Us as it tries the public markets for some much-needed cash:
GOOD:
- Sales gains. Despite the downturn, Toys "R" Us grew sales under private ownership, from $11 billion in '06 to a peak of $13.79 billion in '08. Since then, sales have declined only slightly,
- Store innovation. Last fall, the chain opened more than 90 small Holiday Express stores -- which apparently worked so well 30 of them were still open at the end of January. They also have an initiative to create side-by-side and combined Toys "R" Us and Babies "R" Us stores.
- Owned real estate. Toys "R" Us owns real estate to an extent that's unusual for big retail chains these days -- they own the building and land for 379 stores, and own the stores for another 257 that sit on leased land. That's a hefty, $4 billion asset that could be leveraged any number of ways should the toy-store chain decide to close units.
- Strong online presence. The company has bought up valuable URLs in their sector including eToys.com, Toys.com, and FAO.com. Along with its own Toysrus.com, that puts the retailer in good shape as online buying grows. It'll be a distinct advantage in the videogame category -- 10%-15% of Toys "R" Us' sales -- as digital delivery of games gains in popularity.
- Slow change. Unfortunately, in five years the company has only managed to create about 150 of its new side-by-side and combined stores, despite reports of double-digit sales increases in the combined units and the company's assessment that up to 70 percent of its remaining stores could benefit from a similar makeover. No doubt the company's debt position has hindered progress.
- Executive turnover. The company just lost its executive vice president/chief operating officer of three years, Claire Babrowski, on May 1 -- her LinkedIn profile says she retired. Bad timing just when the company is getting a cash infusion and could be ready to speed up its conversions to new store layouts... but also, what executive at a major company about to IPO retires right before it happens? Makes you wonder what she knows.
- Excessive compensation. OK, so Toys' CEO Gerald Storch, a former Target (TGT) exec, did wring more profit from the company in the last year -- about 50 percent more. But his compensation shot up 100 percent to $4.7 million in cash, stock and other perks. With a board packed with representatives of current majority owners Vornado Realty Trust, Kohlberg Kravis Roberts & Co. and Bain Capital Partners, public shareholders could expect more of the same for their hand-picked man.
- Far-flung stores add costs. Aside from 100 stores in California and 50 each in New York and New Jersey, Toys "R" Us is scattered here, there and everywhere. The chain has many states and countries with few stores -- for instance, 23 states have fewer than 10 stores. That makes deliveries and advertising more expensive.
- Empty stores. Toys "R" Us is sitting on 124 former stores worldwide, about half of which they own (they've closed 50 U.S. stores in the past five years). And only about half of the stores the company vacated are leased out. Sixty-some big, empty pieces of real estate are a real millstone around the giraffe's neck. It's an open question why the company hasn't sold off some of these properties.
- A ticking time bomb of debt. Five years ago, Toys "R" Us went private with $5.5 billion in debt. Now, debt is still over $5 billion, so not a whole lot of progress has been made here. One tranche of the company's long-term debt, $517 million in their revolving credit facility, expires in July. This may be the nut of why the company is trying the public markets now -- it's unclear with their current stack of debts if they'll be able to renew this facility without a cash infusion.
- Asking too much money for a too-small stake. Toys "R" Us may be overreaching with the terms of this IPO. Though the size of the stake and the stock price haven't been announced, rumors are the stake is just 20% or less. Investors may turn up their nose at buying into a situation where they won't really have much control over the company -- and may be overpaying for the privilege.