Toys `R’ Us CEO to Refocus on Sales Growth at Ailing Chain

  • In one of his first interviews, Brandon says he'll take risks
  • Debt-laden retailer is nowhere near a restructuring, he says

Toys “R” Us Inc. Chief Executive Officer David Brandon, who has been at the company for four months, plans to focus on boosting sales after years of the struggling retailer trying to shrink its way to profitability.

The company is going to take more risks and invest in its e-commerce capabilities, Brandon said in one of his first interviews since taking the job. And though the retailer’s debt load has spurred talk of an eventual corporate restructuring, he said Toys “R” Us isn’t “anywhere near” that point. To help get the company’s house in order, Brandon plans to refinance its major borrowings that begin maturing in 2017.

“I didn’t take this job to lead a bankruptcy effort,” Brandon said. “I sure don’t see that as the only alternative at this point.”

Brandon has taken on one of the most challenging jobs in retail. The world’s largest toy chain was taken private by Bain Capital Partners, KKR & Co. and Vornado Realty Trust in a $6.6 billion deal in 2005. Since then, the rise of Web competitors like Amazon.com Inc. has dulled its prospects and performance, leading it to cancel plans for an initial public offering two years ago.

The company has $1.2 billion of debt coming due in 2017 and another $668 million the following year.

Domino’s Turnaround

In his two previous CEO jobs, Brandon turned around private companies and took them public. He most recently did that at Domino’s Pizza Inc., which also was owned by Bain. The private-equity firm purchased the restaurant chain for about $1 billion in 1999 and took it public in 2004. Domino’s now has a market value of about $6 billion.

That success has afforded Brandon, who signed a contract through 2020, time and the resources to revive the retailer, he said. In his first four months, he has already revamped the executive ranks, including terminating Hank Mullany, president of U.S. stores, and eliminating that position.

“I put way more pressure on myself than anyone can put on me,” Brandon said.

Since going private, the company has churned through several strategies to revive sales. The plans have included selling more exclusive toys, ramping up private-label offerings, sprucing up stores and combining Babies “R” Us locations with its namesake toy stores. The retailer also has done plenty of cost cutting.

Bad Holidays

All of that hasn’t returned the company to growth. Revenue has dropped in each of the past three years, including declines during the holidays. Previous management made the decision to reduce discounting to preserve profit margins.

That move helped improve adjusted earnings before interest, taxes, depreciation and amortization -- a measure of operating performance. Profit by that measure rose 10 percent to $642 million last year. Meanwhile, the debt load, including $451 million in interest costs last year, contributed to a net loss of $292 million.

Brandon plans to maintain the bottom line with more of a focus on sales growth, he said. One of the ways he expects to do that is by getting the retailer to take more chances. Becoming too risk-averse often happens at struggling companies because people don’t want to jeopardize their jobs, he said.

Domino’s Playbook

There’s no better example of what he envisions than a big advertising campaign Domino’s did during his stint that panned its pizza as a way to introduce new recipes, he said. While it may have seemed reckless, the company had been testing its new offerings for three years, and knew customers would like it.

“That’s being bold, and we have to have that mindset,” Brandon said. “Not bet the farm. Not be reckless. But what do we need to do that really breaks through? We are going to be testing a lot of stuff that has that potential.”

While Brandon declined to reveal any of the big moves the company may make for the all-important holiday season, he said the company is loading up on more inventory of the industry’s biggest brands, like Star Wars, than in past years. The company has said that it’s hiring fewer temporary workers this year than last: 40,000, down from 45,000 in 2014.

“We have a chance to make this a very successful holiday season,” Brandon said. “It’s easy to say, and now we’ve got to go do it.”

(A previous version of this story was corrected to fix a reference to the timing of debt refinancing.)

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