Toys“R”Us, Inc. Reports Results for Second Quarter 2015

  • Consolidated Adjusted EBITDA1 improved by
    $39 million for the quarter, resulting in an LTM
    1 Adjusted
    EBITDA of $724 million
  • International comparable store net sales increased by 3.3% marking
    the sixth consecutive quarter of improvement
  • Domestic operating earnings improved by $57 million to $78 million
  • Fit for Growth savings target remained at $325 million, amount
    realized increased from $155 million through Q1 to $196 million
    through Q2
  • Consolidated Net Leverage2 improved by
    2.0x to 6.7x

WAYNE, N.J.–(BUSINESS WIRE)–Toys“R”Us, Inc. today reported financial results for the second quarter
ended August 1, 2015.

In the second quarter, consolidated Adjusted EBITDA grew 47%, benefited
by SG&A savings from the “Fit for Growth” initiative. Domestic operating
performance improved significantly and Domestic gross margin rate
remained strong. International continued its positive comparable store
net sales trend with particular strength in Canada, Central Europe and
China and Southeast Asia.

Dave Brandon, Chairman and Chief Executive Officer, Toys“R”Us, Inc.,
stated, “In the two months I’ve been here, I have been impressed with
the work done by the team to right-size the cost structure and position
the company for growth. Now, the focus turns to solidifying our roadmap
for the future and ensuring we have the right talent and structure in
place to move quickly. I am excited to be here and confident in our
ultimate success.”

Second Quarter Highlights

  • Consolidated net sales were $2,293 million, a decrease of $147 million
    compared to the prior year period. Excluding a $144 million negative
    impact of foreign currency translation, net sales declined $3 million.
    The relatively flat net sales resulted from an increase in
    International comparable store net sales, offset by a decrease in
    Domestic comparable store net sales.
  • International comparable store net sales were up 3.3% primarily driven
    by increases in the learning, baby and core toy categories, partially
    offset by a decrease in our entertainment category (which includes
    electronics, video game hardware and software). Domestic comparable
    store net sales were down 2.5% primarily due to a planned decrease in
    promotional activity. While core toy category sales increased, we
    experienced declines in the baby, entertainment and seasonal
    categories.
  • Gross margin dollars were $875 million, compared to $916 million for
    the prior year period, a decrease of $41 million. Excluding a $58
    million negative impact from foreign currency translation, gross
    margin dollars increased by $17 million. Gross margin, as a percentage
    of net sales, was 38.2% an increase of 0.7 percentage points versus
    the prior year period. The gross margin improvement was attributable
    to the Domestic segment, which increased by 1.5 percentage points
    to 36.2% as a result of a prior year $19 million loss on previously
    identified clearance inventory. International segment gross margin, as
    a percentage of net sales, decreased by 0.6 percentage points.
  • Selling, general and administrative expenses (“SG&A”) decreased by $82
    million to $796 million, compared to $878 million in the prior year
    period. Excluding a $50 million favorable impact from foreign currency
    translation, SG&A decreased by $32 million, primarily due to a $15
    million decline in store payroll expenses, a $9 million decrease in
    advertising and promotional expenses and a $6 million reduction in
    sponsor fees as a result of an amendment to the advisory agreement.
  • Operating earnings were $15 million, compared to an operating loss of
    $42 million in the prior year period. Domestic segment operating
    earnings improved by $57 million, primarily as a result of SG&A
    savings compared to the prior year period. International segment
    operating performance and corporate overhead remained
    consistent compared to the prior year period.
  • Adjusted EBITDA1 was $122 million, compared to $83 million
    in the prior year period, an improvement of $39 million.
  • Net loss was $99 million, compared to a net loss of $148 million in
    the prior year period, an improvement of $49 million.

Liquidity and Capital Spending

The Company ended the second quarter with total liquidity of $1.0
billion, comprised of cash and cash equivalents of $417 million and
availability under committed lines of credit of $596 million.
Toys“R”Us-Delaware, Inc. ended the second quarter with $648 million of
liquidity, which included cash and cash equivalents of $151 million.

Through the end of the second quarter of fiscal 2015, the Company
invested $82 million primarily for enhancements to information
technology, store maintenance and improvements to distribution centers,
compared to $86 million in the prior year period.

Further information regarding the Company’s financial performance
relating to the second quarter of fiscal 2015 is presented in its
quarterly report on Form 10-Q, which was filed with the Securities and
Exchange Commission on September 15, 2015.

A summary of our “Fit for Growth” initiative is set forth at the end of
this press release.

1 A detailed description and reconciliation of EBITDA and
Adjusted EBITDA for Toys“R”Us, Inc. and Toys“R”Us-Delaware, Inc., and
management’s reasons for using these measures, are set forth at the end
of this press release. LTM Adjusted EBITDA represents Adjusted EBITDA
for the last twelve months.

2 Net Leverage represents total debt outstanding less cash
and cash equivalents and restricted cash attributed to debt as of the
end of the quarter, divided by LTM Adjusted EBITDA.

About Toys“R”Us, Inc.

Toys“R”Us, Inc. is the world’s leading dedicated toy and baby products
retailer, offering a differentiated shopping experience through its
family of brands. Merchandise is sold in 864 Toys“R”Us and Babies“R”Us
stores in the United States, Puerto Rico and Guam, and in more than 730
international stores and over 240 licensed stores in 38 foreign
countries and jurisdictions. In addition, it exclusively operates the
legendary FAO Schwarz brand and sells extraordinary toys at FAO.com.
With its strong portfolio of e-commerce sites including Toysrus.com,
Babiesrus.com
and FAO.com,
it provides shoppers with a broad online selection of distinctive toy
and baby products. Headquartered in Wayne, NJ, Toys“R”Us, Inc. employs
approximately 66,000 associates annually worldwide. The Company is
committed to serving its communities as a caring and reputable neighbor
through programs dedicated to keeping kids safe and helping them in
times of need. Additional information about Toys“R”Us, Inc. can be found
on Toysrusinc.com.

Forward-Looking Statements

All statements that are not historical facts in this press release,
including statements about our beliefs or expectations, are
forward-looking statements. These statements are subject to risks,
uncertainties and other factors, including, among others, the
seasonality of our business, competition in the retail industry, changes
in our product distribution mix and distribution channels, general
economic factors in the United States and other countries in which we
conduct our business, consumer spending patterns, birth rates, our
ability to implement our strategy including implementing initiatives for
season, our ability to recognize cost savings, marketing strategies, the
availability of adequate financing, access to trade credit, changes in
consumer preferences, changes in employment legislation, our dependence
on key vendors for our merchandise, political and other developments
associated with our international operations, costs of goods that we
sell, labor costs, transportation costs, domestic and international
events affecting the delivery of toys and other products to our stores,
product safety issues including product recalls, the existence of
adverse litigation, changes in laws that impact our business, our
substantial level of indebtedness and related debt-service obligations,
restrictions imposed by covenants in our debt agreements and other
risks, uncertainties and factors set forth in our reports and documents
filed with the Securities and Exchange Commission (which reports and
documents should be read in conjunction with this press release). In
addition, we typically earn a disproportionate part of our annual
operating earnings in the fourth quarter as a result of seasonal buying
patterns and these buying patterns are difficult to forecast with
certainty. We believe that all forward-looking statements are based on
reasonable assumptions when made; however, we caution that it is
impossible to predict actual results or outcomes or the effects of
risks, uncertainties or other factors on anticipated results or outcomes
and that, accordingly, one should not place undue reliance on these
statements. Forward-looking statements speak only as of the date they
were made, and we undertake no obligation to update these statements in
light of subsequent events or developments unless required by the
Securities and Exchange Commission’s rules and regulations. Actual
results and outcomes may differ materially from anticipated results or
outcomes discussed in any forward-looking statement.

 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
        13 Weeks Ended       26 Weeks Ended
(In millions) August 1,
2015
      August 2,
2014
August 1,
2015
      August 2,
2014
Net sales $     2,293 $     2,440 $     4,618 $     4,919
Cost of sales 1,418   1,524   2,881   3,085  
Gross margin 875   916   1,737   1,834  
Selling, general and administrative expenses 796 878 1,623 1,795
Depreciation and amortization 86 95 173 199
Other income, net (22 ) (15 ) (44 ) (27 )
Total operating expenses 860   958   1,752   1,967  
Operating earnings (loss) 15 (42 ) (15 ) (133 )
Interest expense (106 ) (102 ) (220 ) (210 )
Interest income   1   1   2  
Loss before income taxes (91 ) (143 ) (234 ) (341 )
Income tax expense 6   4   2   2  
Net loss (97 ) (147 ) (236 ) (343 )
Less: Net earnings attributable to noncontrolling interest 2   1   3   1  
Net loss attributable to Toys “R” Us, Inc. $     (99 ) $     (148 ) $     (239 ) $     (344 )
 
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)
 
(In millions)         August 1,
2015
      January 31,
2015
      August 2,
2014
ASSETS
Current Assets:
Cash and cash equivalents $       417 $       698 $       353
Accounts and other receivables 243 225 245
Merchandise inventories 2,211 2,064 2,344
Current deferred tax assets 41 45 22
Prepaid expenses and other current assets 149   122   164  
Total current assets 3,061 3,154 3,128
Property and equipment, net 3,222 3,335 3,514
Goodwill 64 64 64
Deferred tax assets 128 133 153
Restricted cash 53 53 55
Other assets 343   376   416  
Total Assets $       6,871   $       7,115   $       7,330  
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable $ 1,246 $ 1,571 $ 1,228
Accrued expenses and other current liabilities 889 1,032 903
Income taxes payable 27 20 24
Current portion of long-term debt 226   176   165  
Total current liabilities 2,388 2,799 2,320
Long-term debt 5,056 4,612 5,247
Deferred tax liabilities 112 112 88
Deferred rent liabilities 342 347 359
Other non-current liabilities 260 255 229
Temporary equity 85 85 83
Total stockholders’ deficit (1,372 ) (1,095 ) (996 )
Total Liabilities, Temporary Equity and Stockholders’ Deficit $       6,871   $       7,115   $       7,330  
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
        26 Weeks Ended
(In millions)

August 1,
2015

     

August 2,
2014

Cash Flows from Operating Activities:
Net loss $       (236 ) $       (343 )
Adjustments to reconcile Net loss to Net cash used in operating
activities:
Depreciation and amortization 173 199
Amortization and write-off of debt issuance costs and debt discount 21 23
Deferred income taxes 2 4
Unrealized losses on foreign exchange 3
Other (9 ) 10
Changes in operating assets and liabilities:
Accounts and other receivables 4 27
Merchandise inventories (166 ) (166 )
Prepaid expenses and other operating assets (15 ) (22 )
Accounts payable, Accrued expenses and other liabilities (435 ) (304 )
Income taxes payable and receivable (17 ) (25 )
Net cash used in operating activities (675 ) (597 )
Cash Flows from Investing Activities:
Capital expenditures (82 ) (86 )
Proceeds from sales of fixed assets 12 9
Decrease (increase) in restricted cash 1 (1 )
Acquisitions (2 )  

Net cash used in investing activities

(71 ) (78 )
Cash Flows from Financing Activities:
Long-term debt borrowings 669 735
Long-term debt repayments (205 ) (341 )
Short-term debt borrowings, net 8
Capitalized debt issuance costs (2 ) (13 )
Net cash provided by financing activities 470   381  
Effect of exchange rate changes on Cash and cash equivalents (5 ) 3  
Cash and cash equivalents:
Net decrease during period (281 ) (291 )
Cash and cash equivalents at beginning of period 698   644  
Cash and cash equivalents at end of period $       417   $       353  
 
 
OPERATING METRICS
(Unaudited)
 
          13 Weeks Ended       26 Weeks Ended
 

August 1,
2015

     

August 2,
2014

August 1,
2015

     

August 2,
2014

Domestic Segment:

Operating Data
Gross margin as a percentage of net sales (1) 36.2 % 34.7 % 36.1 % 35.2 %
Comparable store net sales (2.5

) %

1.5 % (2.4

) %

2.7 %
Change in number of transactions (4.8

) %

0.3 % (4.5

) %

1.8 %
Change in average basket size 2.3 % 1.2 % 2.1 % 0.9 %
Net Sales by Product Category
Baby 46.4 % 47.2 % 48.1 % 48.5 %
Core Toy 14.0 % 13.1 % 13.5 % 12.5 %
Entertainment 5.7 % 6.4 % 6.5 % 7.2 %
Learning 18.2 % 17.7 % 17.9 % 17.5 %
Seasonal 14.9 % 15.0 % 13.4 % 13.7 %
Other (2) 0.8 % 0.6 % 0.6 % 0.6 %
Total 100 % 100 % 100 % 100 %
 

International Segment:

Operating Data
Gross margin as a percentage of net sales 41.2 % 41.8 % 40.2 % 40.6 %
Comparable store net sales (3) 3.3 % 2.5 % 2.3 % 1.7 %
Change in number of transactions (2.5

)  %

5.3 % (0.9

) %

3.4 %
Change in average basket size (3) 5.8 % (2.8

) %

3.2 % (1.7

) %

Net Sales by Product Category
Baby 25.4 % 25.0 % 26.0 % 26.0 %
Core Toy 20.1 % 19.7 % 20.3 % 19.6 %
Entertainment 5.8 % 7.1 % 6.0 % 7.3 %
Learning 26.9 % 25.8 % 27.3 % 26.1 %
Seasonal 20.9 % 21.5 % 19.5 % 20.1 %
Other (4) 0.9 % 0.9 % 0.9 % 0.9 %
Total 100 % 100 % 100 % 100 %
 

Consolidated:

Operating Data
Gross margin as a percentage of net sales (1) 38.2 % 37.5 % 37.6 % 37.3 %
Comparable store net sales (3) (0.2

) %

1.9 % (0.6

) %

2.3 %
Change in number of transactions (3.8

) %

2.5 % (2.8

) %

2.5 %
Change in average basket size (3) 3.6 % (0.6

)  %

2.2 % (0.2

) %

 
    (1)   Fiscal 2014 includes the impact of an incremental loss on previously
identified clearance inventory.
(2) Consists primarily of non-product related revenues.
(3) Excludes the impact of foreign currency translation.
(4) Consists primarily of non-product related revenues, including
licensing fees from unaffiliated third parties.
 
 
FIT FOR GROWTH SAVINGS THROUGH SECOND QUARTER 2015
(Unaudited)
(In millions)                                                                      
Initiatives Domestic International Consolidated
Actual      

Estimated
Remaining

      Total       Actual        

Estimated
Remaining

        Total         Total
Margin Marketing Effectiveness $       79       $     5       $       84 $               $             $       $     84
End-to-End 21 21 21
Private Label         18         18                   12           12           30
Sub-total Margin $ 100 $ 23 $ 123 $ $ 12 $ 12 $ 135
 
SG&A In-Store Operations 36 17 53 6 8 14 67
Supply Chain 1 3 4 9 9 13
Organizational Effectiveness 7 18 25 1 11 12 37
Procurement & Other 39         19         58         6           9           15           73
Sub-total SG&A $       83         $     57         $       140         $       13           $     37           $       50           $     190
Fit For Growth Total $       183         $     80         $       263         $       13           $     49           $       62           $     325
 

Non-GAAP Disclosure of EBITDA and Adjusted EBITDA

We believe Adjusted EBITDA is useful to investors because it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in our industry. Investors in the
Company regularly request Adjusted EBITDA as a supplemental analytical
measure to, and in conjunction with, the Company’s financial data
prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”). We understand that investors use Adjusted
EBITDA, among other things, to assess our period-to-period operating
performance and to gain insight into the manner in which management
analyzes operating performance.

In addition, we believe that Adjusted EBITDA is useful in evaluating our
operating performance compared to that of other companies in our
industry because the calculation of EBITDA and Adjusted EBITDA generally
eliminates the effects of financing and income taxes and the accounting
effects of capital spending and acquisitions, which items may vary for
different companies for reasons unrelated to overall operating
performance. We use the non-GAAP financial measures for planning and
forecasting and measuring results against the forecast and in certain
cases we use similar measures for bonus targets for certain of our
employees. Using several measures to evaluate the business allows us and
investors to assess our relative performance against our competitors.

Although we believe that Adjusted EBITDA can make an evaluation of our
operating performance more consistent because it removes items that do
not reflect our core operations, other companies, even in the same
industry, may define Adjusted EBITDA differently than we do. As a
result, it may be difficult to use Adjusted EBITDA or similarly named
non-GAAP measures that other companies may use to compare the
performance of those companies to our performance. The Company does not,
and investors should not, place undue reliance on EBITDA or Adjusted
EBITDA as measures of operating performance.

A reconciliation of Net loss attributable to Toys “R” Us, Inc. to EBITDA
and Adjusted EBITDA for Toys “R” Us, Inc. is as follows:

        13 Weeks Ended       26 Weeks Ended       LTM  
(In millions)

August 1,
2015

     

August 2,
2014

August 1,
2015

     

August 2,
2014

August 1,
2015

     

August 2,
2014

Net loss attributable to Toys “R” Us, Inc. $     (99 ) $     (148 ) $     (239 ) $     (344 ) $     (187 ) $     (1,159 )
 
Add:
Income tax expense 6 4 2 2 32 292
Interest expense, net 106 101 219 208 458 499
Depreciation and amortization 86   95   173   199   351   392  
EBITDA 99 52 155 65 654 24
 
Adjustments:
Foreign currency re-measurement (a) 9 3 18
Compensation expense (b) 8 5 11 5 28 9
Severance (c) 8 4 13 15 15 15
Impairment of long-lived assets 2 4 4 7 10 48
Net earnings attributable to noncontrolling interest 2 1 3 1 6 4
Certain transaction costs 1 1 2 1 (1 ) 1
Net gains on sales of properties (6 ) (3 ) (7 ) (3 ) (9 ) (4 )
Litigation (d) (1 ) (1 ) (9 ) 3
Sponsors’ management and advisory fees (e) 6 5 12 11 23
Store closure costs (f) 4 5 3 7
Property losses, net of insurance recoveries (g) (7 ) (7 ) (2 ) (7 )
Obsolete inventory clearance (h) 20 9 60
Prior period adjustments (i) 17
Goodwill impairment (j)           378  
Adjusted EBITDA (k) $     122   $     83   $     192   $     110   $     724   $     578  
 

A reconciliation of Net loss to EBITDA and Adjusted EBITDA for Toys “R”
Us-Delaware, Inc. is as follows:

        13 Weeks Ended       26 Weeks Ended       LTM  
(In millions)

August 1,
2015

     

August 2,
2014

August 1,
2015

     

August 2,
2014

August 1,
2015

     

August 2,
2014

Net loss $     (57 ) $     (116 ) $     (135 ) $     (240 ) $     (121 ) $     (775 )
 
Add:
Income tax expense 3 9 4 9 2 60
Interest expense, net 39 40 86 83 200 169
Depreciation and amortization 58   64   115   137   230   262  
EBITDA 43 (3 ) 70 (11 ) 311 (284 )
 
Adjustments:
Foreign currency re-measurement (a) 9 3 18
Compensation expense (b) 4 2 4 12 6
Severance (c) 4 2 8 12 9 12
Impairment of long-lived assets 1 3 2 6 3 25
Certain transaction costs 1 1 (3 ) 1
Net gains on sales of properties (1 ) (1 ) (2 )
Litigation (d) (8 ) 3
Sponsors’ management and advisory fees (e) 5 4 11 10 18
Store closure costs (f) 7 5 24 16
Property losses, net of insurance recoveries (g) (7 ) (7 ) (2 ) (7 )
Obsolete inventory clearance (h) 20 9 60
Prior period adjustments (i) 17
Goodwill impairment (j)           361  
Adjusted EBITDA (k) $     57   $     24   $     96   $     29   $     374   $     226  
    (a)   Represents the unrealized loss on foreign exchange related to the
re-measurement of the portion of the Tranche A-1 loan facility due
fiscal 2019 attributed to Toys “R” Us (Canada) Ltd. Toys “R” Us
(Canada) Ltee.
(b) Represents the incremental compensation expense related to certain
one-time awards and modifications, net of forfeitures of certain
officers’ awards. In fiscal 2014, we revised our definition of
Adjusted EBITDA to include the impact of forfeitures of certain
officers’ awards and have therefore revised our prior periods’
Adjusted EBITDA.
(c) In fiscal 2014, we revised our definition of Adjusted EBITDA to
include non-officers’ severance. We have therefore revised our prior
periods’ Adjusted EBITDA.
(d) Represents certain litigation expenses and settlements recorded for
legal matters.
(e) Represents the fees expensed to our Sponsors in accordance with the
advisory agreement. In June 2015, the advisory agreement was amended
in order to reduce the advisory fees payable in fiscal 2015 and
thereafter from $17 million to $6 million annually.
(f) Represents store closure costs, net of lease surrender income. In
fiscal 2014, we revised our definition of Adjusted EBITDA to include
lease surrender income. We have therefore revised our prior periods’
Adjusted EBITDA.
(g) Represents property losses and insurance claims recognized.
(h) Represents the incremental expense related to the write-down of
excess and obsolete inventory. In fiscal 2014, we also revised our
definition of Adjusted EBITDA to include third party fees associated
with our clearance efforts. We have therefore revised our prior
periods’ Adjusted EBITDA.
(i) Represents a non-cash cumulative correction of prior period accrued
vacation accounting in fiscal 2013.
(j) Represents the impairment of goodwill associated with our
Toys-Domestic and Toys-Japan reporting units.
(k) Adjusted EBITDA is defined as EBITDA (earnings (loss) before net
interest income (expense), income tax expense (benefit),
depreciation and amortization), as further adjusted to exclude the
effects of certain income and expense items that management believes
make it more difficult to assess the Company’s actual operating
performance including certain items which are generally
non-recurring. We have excluded the impact of such items from
internal performance assessments. We believe that excluding items
such as Sponsors’ management and advisory fees, asset impairment
charges, restructuring charges, severance, impact of litigation,
store closure costs, noncontrolling interest, net gains on sales of
properties and other charges, helps investors compare our operating
performance with our results in prior periods. We believe it is
appropriate to exclude these items as they are not related to
ongoing operating performance and, therefore, limit comparability
between periods and between us and similar companies.
 
 

Contacts

Toys“R”Us, Inc.
Lenders and Note Investors:
Chetan
Bhandari, 973-617-5841
Senior Vice President, Corporate Finance &
Treasurer
Chetan.Bhandari@toysrus.com
or
Media:
Kathleen
Waugh, 973-617-5888 or 646-366-8823
Vice President, Corporate
Communications
waughk@toysrus.com