Playtime At Toys 'R' Us

Saddled with debt and left by some for dead, it's on the rebound.

With consumers able to buy toys everywhere, from Amazon to the local drugstore, big toy chains have mostly withered away -- which makes it all the more remarkable that Toys "R" Us is still very much in business in the U.S. and expanding in countries such as China, Japan, and the U.K. 

Taken private by KKR, Bain Capital and Vornado Realty Trust in a 2005 leveraged buyout that saddled it with debt, Toys "R" Us had all been written off by most retail watchers as a relic that would go the way of Borders or Circuit City. The company scrapped IPO plans. Its debt levels skyrocketed. Suppliers had trouble getting loans to finance the production of goods for the retailer. It counted three CEOs in three years. 

But lately, things are starting to look up.

Its new CEO came aboard with little retailing experience and had suffered an unceremonious exit as the University of Michigan's athletic director. But he'd also brought Domino's Pizza into the digital age, and he has better integrated the physical and online businesses of Toys "R" Us while cutting costs and raising efficiency. The company notched a strong holiday season in which its adjusted Ebidta rose 12 percent from the year before, with Star Wars gear helping drive shoppers into its stores -- a trend likely to continue as more movies are released.

Play For Keeps

Toys R Us's fourth-quarter adjusted Ebitda rose 12 percent to $564 million from the year before

Source: Bloomberg

A look at the bond market shows investor optimism returning; Toys "R" Us bond prices have been rising since the company reported holiday sales. Moody's gave another boost on March 2, when it upgraded its outlook on the company's debt to "stable" from "negative." 

Toy Rally

Toys R Us bondholders are pricing in progress at the retail chain

Source: Bloomberg

Sure, it's not all fun and games yet. The real test will come over the next 15 months, as the company looks to refinance $450 million of debt due in August 2017 and $725 million of debt due in December 2017, amid what my colleague Lisa Abramowicz deems a roller-coaster ride of a junk bond market. The Wall Street Journal in February reported that, if push came to shove, Toys "R" Us could mortgage its European operations.

But Moody's analyst Charles O'Shea told Gadfly the company has a strong track record of refinancing debt in tumultuous times. He pointed to the beginning of 2013, when Europe's financial stability was described by the IMF as fragile at best. The company was still able to refinance $1.3 billion in European and domestic maturities even as it was hemorrhaging sales. O'Shea said the company has support from key vendors such as Hasbro and Mattel, which can often make or break a struggling retailer, and that it's gaining traction online and in international markets. 

It will certainly take Toys "R" Us years to start turning a profit big enough to pay down its $5 billion in debt and eventually fulfill its private equity owners' hopes of an eventual exit

Empty Toy Chest

Toys R Us annual net income/loss

Source: Bloomberg

But for the first time in years, Toys "R" Us seems to have the building blocks it needs to actually move in the right direction.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at

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    Mark Gongloff at

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