Toys ‘R’ Us – the 70-year-old business empire is officially over – writes a business lesson that couldn’t be more expensive.
Although possessing a history of over 50 years of establishment and development and once considered a symbol of the US toy industry, Toys ‘R’ Us’s seemingly endless business path has been. must close, when this toy company declares to close or sell all remaining stores in America.
After filing for bankruptcy protection in September 2017, on March 15, 2018, Toys ‘R’ Us announced that it would close or sell all of its 735 remaining stores in the US. . This means that more than 30,000 workers working for this long-standing toy retailer will be unemployed. Sadly, a few days after applying for bankruptcy, Charles Lazarus – the father of Toys ‘R’ Us – also passed away.
Golden past …
Toys ‘R’ Us, for those who don’t know Toys ‘R’ Us, has been around for 70 years, since it was founded in 1948 in Washington DC, by Charles Lazarus, formerly a store selling children’s goods. – Children’s Bargain Town. At that time, Lazarus foresaw that American soldiers returning from World War II would surely get married, and there was a need to have a place for them to buy children’s goods.
Lazarus also realizes that the most profitable business products are not beds, cribs or cribs, but toys. The lifespan of a toy is quite low, they break down easily and can turn trendy and obsolete, but one thing is certain: they are present in every child’s life.
Toys ‘R’ Us was born from that logic, and has become one of the most successful businesses in the US economy. After its initial public offering in 1978, Toys ‘R’ Us has become one of the most popular businesses for Wall Street investors.
In 1980, the Los Angeles Times called Toys ‘R’ Us one of the most attractive stocks on the New York Stock Exchange. And the Wall Street Journal once made headlines about Toys ‘R’ Us in 1988 with the following content: “Toys ‘R’ Us – the big man in the region – is still growing continuously”. The Washington Post even views Toys ‘R’ Us as a symbol of the US economy, alongside McDonald’s.
… to the huge debt burden from LBO (Levaraged Buyout)
By the early 1990s, Toys ‘R’ Us was still very popular with its toy products. However, since 1998, things began to change when Walmart decided to go head-to-head with Toys ‘R’ Us and aim to dominate the market for toys sold during the holiday season. As a result, Toys ‘R’ Us sales have steadily declined over time, and by 2005 Walmart outperformed Toys ‘R’ Us in the number of toys sold.
Toys ‘R’ Us’s stock fell miserably, and a number of struggles at the time led toy brand executives to decide to sell the company. In 2005, KKR, Vornado Realty Trust and Bain Capital bought Toys ‘R’ Us for about $ 6.6 billion, in the midst of a toy company carrying nearly $ 1 billion in debt. Combined for the two, Toys ‘R’ Us was then fully valued at $ 7.5 billion.
However, there is one notable point: investors from KKR, Vornado Realty Trust and Bain Capital did not buy Toys ‘R’ Us with their own money but used the form of “debt buyback”, or also known as “speculative debt acquisition” – LBO. Specifically, they only poured into Toys ‘R’ Us $ 1.3 billion of their money and used the company’s assets to mortgage and borrow another $ 5.3 billion, an action that caused the toy company to burden some huge debt – $ 6.2 billion.
In closing, after the LBO deal, the total debt that Toys ‘R’ Us has to bear accounts for 82.7% of the total investment ($ 6.2 billion / $ 7.5 billion). At the time, the interest on the debt was about 7.25% – meaning Toys ‘R’ Us had to pay up to $ 450 million in interest each year. Toys ‘R’ Us’s annual sales are over $ 11 billion, and by 2005 the toy company was trying hard to make a profit of about 2%, or $ 220 million. It turns out that the debt that Toys ‘R’ Us has to pay is twice its net profit. Until more than 10 years later, the toy company was still in debt but could not manage it.
Business lessons from investing are based on subjective assumptions
Why did investors at that time decide to borrow to buy Toys ‘R’ Us? Before deciding on LBO, normally, a company is “selected as a candidate” when possessing the following criteria: a low existing debt burden, a history of stable and periodic cash flow over many years, The acquirer’s body has the ability to innovate the management and operation of the company under LBO, and favorable market conditions.
In the case of Toys ‘R’ Us, investors from KKR, Vornado Realty Trust and Bain Capital decided to do LBO on Toys ‘R’ Us because they thought it met the criteria above. Investors guessed they could cut operating costs to improve cash flow, thus paying interest on debt. In addition, they claim that extra money can be made by selling some of the properties that are rarely used. But they were wrong!
Most frightening is that they think the retail market will not change too much. Investors have borrowed to buy Toys ‘R’ Us without thinking that they will need money to implement contingency plans if the market or competitors have an unexpected change. far from expected.
It is such subjective assumptions that make Toys ‘R’ Us pay dearly!
“The difficulty bundle the wisdom”
At the time of 2005, e-commerce or e-commerce was a very new concept. Amazon was just a $ 8.5 billion company, not the $ 100 billion giant it is today. As a result, Toys ‘R’ Us’s investors did not pay much attention to the quiet change in the retail market, from traditional to online. So, they only focus on competing with Walmart or Target.
The plan was to reduce operating costs, close some inefficient stores, franchise overseas or sell off some of the less-used assets (like real estate) to raise money. face and repay.
So as Amazon continues to grow and grabs retail market share, Toys ‘R’ Us can only sit and watch helplessly. Because, the toy company cannot afford to be able to both compete with a brick-and-mortar model on the traditional front, balance Amazon on the online front, and pay off debt at the same time.
As Charlie O’Shea – an analyst from Moody’s Financial Group, said: “While Toys ‘R’ Us gradually lost its position, big competitors like Walmart, Amazon and Target are running at full capacity ”. The reason is that the huge debt burden in 2005 inhibited and inhibited all financial decisions or competition plans. No matter how talented the Toys ‘R’ Us board is, it’s a feat to keep the toy company alive.
Therefore, the toy company could only sit and watch Amazon’s market share expand and expand with the development of e-commerce; helpless to improve customer experience in traditional stores. In that context, ending today is inevitable.
The other impossible end of not embracing a trend
For many analysts, Toys ‘R’ Us is a typical “victim” of the e-commerce trend. Despite being a giant for several decades, Toys ‘R’ Us’s advantage has slowly disappeared as consumers increasingly prefer to buy with just one click.
When they bought Toys ‘R’ Us, investors never expected that e-commerce would one day thwart traditional stores. This leads to the real estate that specializes in renting to make retail stores also drop in price. As prices for retail property in the US have been steadily rising over the past few decades, investors in Toys ‘R’ Us have “defaulted” that they will continue to rise. So they think they can at least sell real estate, whether owned or leased, to pay off debt. However, e-commerce has completely broken this assumption.
Besides, for today’s children, electronic devices have gradually replaced traditional toys. According to the Washington Post, 67% of children have at least one tablet or smartphone; and 59% say owning them is the number one priority. Their parents cannot afford to buy smart devices and spend money on toys.
In addition, there is another extremely important trend that has contributed to the killing of Toys ‘R’ Us: Decreasing fertility. According to the Washington Post, in its bankruptcy petition, Toys ‘R’ Us wrote the following:
“The drop in birth rates in the countries where we sell have had a negative impact on our business. Toys ‘R’ Us products are primarily targeted at newborn babies and children, so our revenue depends on the birth rate in those countries. In recent years, birth rates in many countries have decreased or stood still while the population is aging and the cost of education has increased. The trend of aging population and decreasing fertility, if continued, will damage our business ”.
In the US, home to Toys ‘R’ Us, the country’s fertility rate has steadily declined since the “Great Recession” in the 2000s. The rate hit its lowest point in 2016. , according to the US Centers for Disease Control and Prevention. It can be said that Toys ‘R’ Us is just one of a myriad of business models, regardless of industry, that are facing one truth: Economic growth is not accompanied by population growth. This business lesson is not for the few.
* Source: Saigon Businessman