Toys ‘R’ Us: Flat Revenue, Bad IPO

By Douglas A. McIntyre Published May 28, 11:44AM EDT

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Toys “R” Us has filed its S-1 with the SEC as it prepares its IPO. The retailer plans to raise $800 million. The company has been private for half a decade. It’s time to pay down debt and let the private investors get liquidity. On July 21, 2005, Toys “R” Us was acquired by an investment group led by entities advised by or affiliated with Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co., L.P., and Vornado Realty Trust. Toys “R” Us spends a great deal of its effort in the S-1 talking about its growth strategy, one that ultimately has not worked.

We have brand names that are highly recognized around the world, strong relationships with our guests and vendors and we believe we have the broadest year-round product assortment. We also believe our focus on quality of products, service and safety is a competitive strength. In the U.S., in fiscal 2009, approximately 70% of households with kids under 12 shopped at Toys “R” Us, and 84% of all new mothers shopped at our Babies “R” Us stores.

Toys “R” Us also reports that a large portion of its success is based on its online growth.

Toys “R” Us has had almost no revenue growth in four years. In fiscal 2007, which ended on February 3 of that year, the company had sales of $13.1 billion. The next two years, revenue rose to $13.7 billion. In the last year, it fell to $13.6 billion. The improvement in net income in the last two years is almost entirely due to cost cuts. Net in the last fiscal was $312 million. The year before, it was $218 million. EBITDA and adjusted EBITDA follow the same pattern. In other words, there is no growth story.

It is easy to see why the company wants to raise the $800 million. Toys “R” Us is being crushed by over $5 billion in debt.

Among the risk factors in the Toys “R” Us S-1, there are two which should concern investors. The first is that the company relies heavily on the deteriorating video game business for sales. These sales represent 10% to 15% of revenue. The other issue is that the number of young children is declining as birth rates fall.

Toys “R” Us is about to come to market with an IPO to pay its debt. That is good for debt-holders, but there is nothing about the company that make it an attractive stock to own.

Douglas A. McIntyre

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.