Amazon would have killed Toys "R" Us regardless of the leverage on the company. Otherwise, the company would be able to come out of bankruptcy with less leverage and survive/thrive.
2
I for one will not lament the closing of Toys R Us and the other mall scarring America, big box trash stores. Good riddance to all of these chains. Hate 'em.
2
Toys R Us blames demographics, and the declining birthrate on their decision to close. I would blame it on all the junky toys they stocked,
every one of them destined for the
garbage dump, sooner, rather than later.
3
10 years from now they will re-print this same article, switching T-R-U with the name Amazon and add the name of the new idea that killed it. In the end there will be more employees looking for work and more Romney types smiling at the club!
Convert all of the failed malls of America into housing, schools and medical centers.
3
The number of companies closing after being buried in debt by Hedge Funds continues to climb. LEVERAGE kills around 76 % of the time !!
What companies are being buried in debt by hedge funds? Are you not aware of the difference between hedge funds and private equity? Further, can you substantiate your claim that "LEVERAGE kills around 76% of the time?" And finally, are you are aware that the portfolio companies of the top private equity firms outperform their publicly trade peers over long term periods (5 years) across a series of key operating and financial metrics?
If you ever want to know how Mitt Romney and his "BainBuddies" got so rich just ask a newly unemployed ToysRUs worker.
1
They got rich because at the vast majority of the companies acquired by Bain Capital significant performance increases resulted over longer term periods leading to also significant value creation. The portrayal of certain companies during the 2012 Presidential election was disingenuous and showed only the anomalies (and even then did not provide all of the facts).
2
Toys R Us stores seemed consistently dirty, unorganized with few and sullen employees. So many toys arranged to encourage greedy "I want this, I want that", another nightmare for families barely making ends meet. No matter what you walk away with, the kids are pouting. Say what you want about Amazon but you can refine your selection by Prime free shipping, age range, average review and most importantly PRICE. Your child can see what suits their needs in YOUR price range and as a bonus, at any age they can be taught to read product reviews and learn to be a wise consumer.
2
Nothing much ever changes in the world of vulture capitalism.
"When you get out of a place like Harvard, you can do anything – at least in the old days you could," says a prominent corporate lawyer on Wall Street who is familiar with Romney's career. "But he comes out, he not only has a Harvard Business School degree, he's got a national pedigree with his name. He could have done anything – but what does he do? He says, 'I'm going to spend my life loading up distressed companies with debt."
"Greed and Debt: The True Story of Mitt Romney and Bain Capital"
By Matt Taibbi
August 29, 2012
https://www.rollingstone.com/politics/news/greed-and-debt-the-true-story...
CalPERS has a $40 billion private equity investment . ... curious if this debt write-off could affect CalPERS . .. or any other pension fund for that matter.
1
Countless retail stores have closed during the past several years. This is not due to the fact that almost every product is available online. The reason is that consumers often prefer to shop online rather than at retail stores.
In 20 years, when something comes along to drives Amazon out of business, people will be pining for the good and pure days when Ma and Pa had to use their physical body to operate their non-sentient "smartphone," and you had to wait two whole days before a non-cybernetic human would come by and deliver your Nintendo Switch. "It was so much better then, when you knew a human packed your Prime package." And the kids of tomorrow will roll their eyes just as they do now.
All things change. There is no inherent goodness or evil in the old or new. But Toys'R'Us might have changed with the times if the management hadn't expected a bunch of Gordon Gecko types to rescue their company.
2
I'm sad for the employees however the handful of times I've visited TRU the stores were in disarray, or they didn't have what I needed. Then they complain why people turn to Amazon. People blame Amazon but at the end of the day EVERYBODY knows that you can find exactly what your looking for 98% of the time at Amazon....
7
Eventually folks there will be two companies running the US it will be Amazon and Walmart you watch it happen. They will own all the other companies and their stock as well. The little man will be reduced to nothing.
4
I) One of the benefits for large private equity firms of late has been a very low cost of capital in this era of extremely low interest rates. Debt has been very cheap. So, a private equity firm can target a buyout candidate.
II)Of major importance is the target's current capital structure. A capital structure is composed of 3 elements: 1) Short-term debt; 2) Longer-term debt; and 3) Stockholders' equity (SE). These debt and equity elements finance a firm's assets.
III) All firms have accounts payable, wages payable, taxes due, and other short-term debt. This debt is more uniform across firms.
IV) But, the amount of long-term debt varies markedly across firms. Some managers are very conservative and eschew long-term debt. The lower the long-term debt, the greater the amount of less risky SE in the firm's capital structure.
V) For example, with a debt ratio of 20%, composed only of payables and no long term debt, 80% of the firms capital is supplied by SE. Thus, much more long-term debt can be issued by the firm. Its assets act as a form of collateral backing the safety of this additional debt. As the debt ratio grows to (50/50), then interest expense grows with the larger debt load but also because the risk of bankruptcy grows, too. Its cost of borrowing or money rises.
VI) At (60 Debt/40 SE); risk grows even more. Is a capital structure composed of (70 Debt/30 SE) still safe? Where is the safe stopping point in this game?
[F 3/16 12:42p Greenville NC]
1
Anyone who thinks that the loss of Toys R Us - and rise of Amazon presents new and amazing opportunities for the little toy store to compete is delusional. The biggest cost for toy retailers, large and small, is shipping. These days, thanks to amazon, all consumers expect free shipping. Well - when you are a "mom and pops" online retailer that comes out of your profit for selling the toys - making your margins nearly none. The little guy can't negotiate with wholesalers on price, can't negotiate with amazon on their fulfillment cut and certainly can't afford to compete on the B2C end on price - making the idea that there will be all these novelty shops popping up ridiculous. Those that exist hang on by a thread - and most won't and don't survive. In what way did amazon help the independent book retailer?
3
How is this sad? If you're sad about a retail store closing, you're deeper down the rabbit hole of consumerism than you think. All Toys R Us was was a big box to store the toys till you wanted to buy them. Well, Amazon has a bunch of big boxes too, and a far more convenient user interface: No screaming, mucous-filled kids that aren't yours getting in the way of your shopping experience. Also, the staff was totally uninformed. And why should they be for minimum wage? I can get far better information online. Everything is better online. Big box stores, like malls, are dead and good riddance.
3
Convert all of the malls of America into housing, schools and medical centers.
3
Amazon seems to be the goat when another retailer goes under. For a year now I've been wanting to praise Amazon for the good things they do. For an oldtimer like me who no longer is able to hit the malls, Amazon has been a source of countless products: toilet paper for my favorite food bank; books to read; hearing aid batteries; tuna fish and cereal. Let's put some balance in those negative comments! Amazon is not all bad and perhaps they are filling a gap in the commercial world that no one else has thought of.
3
Amazon? Nope. I just did a quick searcy on ETSY - "wooden toy tractor". I founr ELEVEN, yes ELEVEN pages of creative playthings for an age range from infant to adult collector, many very reasonably priced wooden tractors. The couple of pages I skimmed contained tasteful handmade items that would offer a child much better play value than the cheap junk at ToysRUs. For a shrinking kids market, grandparents buy this type of toy quite frequently, as do upscale parents - and those without a lot of disposable income simply can't afford lots of "stuff". Before decrying Amazon and other big box retailers, do look at what is now a burgeoning economy of small producers using Etsy, eBay, their own word of mouth, private web sites - to market their wares. I run a 6-figure retail shop catering to fiber artists in a no-name town and we can't keep up with orders at the moment. Not every part of the economy depends on "suits" in head offices. Mom and Pop shops can make a decent profit if a bit clever.
5
I find it very interesting when people jump on the amazon bashing wagon any time a store closes. It's not about Amazon wiping stores like Toys R Us out. its about greed as displayed here by private equity and consequently the lack of investment to innovate, redesign, reinvigorate the brand. I used to shop for my step-son at Toys R Us through 2-12 years old (now he's 19), and it was joy, an experience, fun-filled memories. Last i step to the store was 4 years ago and what an abysmal experience it was. Like a graveyard of childhood fantasies and dream. Utter despair is what Toys R Us became!
2
If private equity is so evil, why is it that:
1) A huge wealth transfer has taken place with assets moving to PE funds over the last couple of decades? If PE did not work, this would not be the case.
2) The portfolio companies of the top private equity firms consistently outperform their public company peers on all key operating and financial metrics over 5 year periods? (None of these measures have anything to do with the debt levels on these companies)
2
MICHAEL CORKERY - There is a lot more to the story between Amazon and Toys R Us. Can you now do an article about the history between Amazon and Toys R Us? Do you even know that history? - do your homework and see - the quick version - Toys R Us made a contract with Amazon - at the dawn of online retailing - that Amazon would handle the online ordering and delivery for Toys R Us - with the stipulation that Amazon would not sell toys from others. Amazon then learned all it could about toy business from Toys R Us - copied the big toy book put out by Toys R Us every year - and, when it had what it needed, broke the deal with Toys R Us and started selling toys from other companies...Toys R Us sued Amazon. And won. But did Jeff care? Noooooo. He simple paid the fine (about $5 million I believe) chump change to him even then, and started their online toy business. Meanwhile, Toys R Us had already fallen behind digitally and never could catch up. Toys R Us was accustomed, at the time, to dealing honestly. Has Amazon ever been?
6
I am glad someone remembered that. Toys R Us, did try did sue Amazon for breach of contract. Amazon was completely wrong in their dealings with Toys R Us. People are really not informed, we are living for a 2 cent discount today, no one is thinking of the future. America has become a dog eat dog country, it is truly scary. I am very sad about this as this was an American Icon. Toys R Us is/was the most popular American brand in the world 2nd to Disney world. Besides Disney World there is no other company that caters to kids. America values and culture are definitely going in the toilet. Just my thoughts.
1
This Toys'R'Us story is really the story of America in the Age of Trump. TRU management invited a bunch of Gordon Gecko types to save them, but instead their new investors made a tidy profit and TRU went out of business.
Mnuchin, Pruitt, Trump...they were supposed to rescue this country from "American carnage." Yet, mostly we seem to pay for Trump's vacations and Mnuchin's trips on air force planes. They've given themselves big tax cuts and loosened regulations for their friends and former employers. But who will pay for this tab when it's all done?
1
Time brings on changes. It’s not like Amazon just arrived yesterday. The game doesn’t change, it just has a different swagger. When stores like Amazon arrived, that was the time for Toys “R” Us to evaluate the entire company instead of remaining stagnant (the majority of the companies built long ago don’t ever ask the consumer what they want. They assume people are happy with the old fashioned way in the 21st century. … Really Toys ”R” Us could’ve found a way to work with Amazon; if you can’t beat’em join’em. But it’s too late for what could’ve been). … (Because) Retail is not forever. One day Amazon and Walmart will gone too, or still around with a “different swagger”.
3
Thank you NYT for pointing out the culpability of private equity firms like Vornado Realty Trust is leading to the demise of Toys 'R' Us. I truly appreciate the NYT publishing all the salient points instead of just the pat answers you typically see of...."oh, it's just Amazon and Walmart again." No folks, retailing is suffering but they are having help being pushed off the cliff.
Vornado was also responsible in almost bankrupting JCPenney as well. Retail is in the midst of major paradigm shift and it's hard enough to successfully manage this transition without the private equity firms, many with little credible retailing experience, circling.
As unsettling as it may be to see another familiar piece of our 20th century retail landscape fade away, in reality Toys'R'Us was a depressing sea of plastic that forced the classier toy store chain FAO Schwarz to abandon its traditional better made European toys to compete which in the end did not save it. I do hope that new bricks-and-mortar toy stores emerge to give adults a place to take a child to let them choose a special gift for themselves or for a friend's upcoming birthday party. I doubt a brown cardboard box dropped off on the doorstep delivers that same experience.
5
These "private equity" buyouts have always been a scam to make money off of nothing. They borrow huge sums to "buy" the company, take their cut out of the loans (instead of earning it our of later profits) and they are free and clear. They may work to "turn the company around" for awhile but most of the time it is a disaster for the company - the massive debt load just about guarantees the company will fail. But the "private equity" folks walk away with their millions and move on to their next mark. Yep, con men all the way.
The way to reform this is to put the debt on the "private equity" firm, not the company. They pay the bill when it comes due. Make that the premise and these buyouts will just about disappear because these people know the risk of failure is very high.
12
Do you have the facts to support your claim of the private equity being a scam? The answer could not possibly be yes - just consider the following:
1. Over the last two decades there has been a massive transfer of wealthy to private equity. All institutional investors have significant investments in private equity funds.
2. At the top private equity firms, their portfolio companies consistently outperform their publicly traded peers in numerous key operating and financial measures over 5 year periods. Scams do not result in this level of performance.
1
I shop online often but a toy store? A toy store is all about touching and trying out and discovery. How can you replicate that online?. Glad my child and his cousins got to spend time in toy stores where you could see and touch the merchandise.
1
Yesterday I spent the afternoon walking around Center City, Philadelphia. It was my neighborhood until 15yrs. ago, when I got priced out. Back then there were thousands of interesting shops of every description. It was a stimulating, fun, and in retrospect, reassuring shared environment, full of surprises.
Now it resembles a bleached-out coral reef, with only Starbuck's, expensive restaurants, and stores selling prepackaged electronics to be seen (along with a few brave holdouts). Any people you see have their heads bowed, staring at their phones. No one is looking up.
8
I am a toy collector and for 25 years couldn't find the toys that I was looking for at ToysRUs. Their merchandise was tailored to young kids, not collectors or folks who wanted to purchase high quality toys, including toys from Europe. Almost all the toys I own were purchased from comic book stores, ebay, toy distribution websites and yes Amazon. You could also find a lot of the stuff they sold at Target and Walmart. ToysRUs stores were also ugly both in and outside the store. I last went to ToyRUs about six months ago to purchase Wonder Woman collectibles (which were shown on their website). I went to the store manager and asked where these toys were, and he said they didn't have any. As I was walking through the store, I found a huge display of Wonder Woman action figures and brought the manager to show that he didn't know what he was talking about. ToysRUs has been in a sorry state for many years.
7
I have heard and read stories about how much people appreciated Toys 'R Us and are saddened by its demise. I respectfully disagree. I am sorry for the people losing their jobs. But I've felt the place has been incredibly depressing for years.
We were living in Indianapolis at the time when we took my then 2-year-old son in there. (He is now 20.) The place had the feel of a factory. It was loud and dark. The employees looked incredibly depressed. There were a lot of toys, but I thought they were pretty cheap brands. It was much how I remembered it as a kid and we never went back.
I am sure the issues this story mentioned were a factor, and maybe its demise was inevitable in the age of Amazon, but it sure didn't help itself along the way, in my opinion. As another reader noted, it's time to put an end to these debt for equity swaps being used as a tax advantage. Retail is going through so many changes. This won't be the last iconic brand to disappear.
4
Children are no longer playing with traditional toys for as many years as they once did. A larger question will be where will people work once Amazon displaces all of this retail and replaces its own workers with robots?
6
Sounds like a new budding constituency for a failed businessman/game show host to promise to bring back toys if they will believe him, vote for him and pay for him! Of course his tax returns will reveal investments in toy factories in Communist and semi-communist countries!
3
Another sad case of private equity raping/ruining companies and the employees and communities bearing the brunt of private equity greed. There really should be some kind of legislation passed to limit the passing off of the consequences of private equity's greed to working folk and communities.
13
Your lack of understanding of private equity is clear from your comments. Consider the following:
1. A massive wealth transfer has taken place into private equity over the last two decades. This is primarily fueled by institutional investors. If the situation re PE was as you describe, this would not have taken place nor would PE firms be raising record funds presently.
2. The portfolio companies at the top PE firms outperform their publicly traded peers in numerous key operating and financial measures over 5 year periods.
2. Some deals do go bad but they are an exceedingly small minority of the total number of transactions.
At one time TRU was the big villain--opening stores in local malls in my area and putting the squeeze on independent single-owner toy stores where staff knew their products and were happy to special-order an item for a customer. TRU was happy to siphon business from these small stores.
The only reason I would shed a tear about the demise of TRU would be for employees. A pile of debt, competition from Target and Walmart as well as Amazon, a CEO unprepared for the challenges, and fickle consumers--not a good formula for success. Plus a glut of cheap stuff out there.
13
The U.S. economy faces both external and internal threats. We've been hearing a lot lately about external threats from China's unfair trade practices and Russia's cybercriminals. But let us not forget that internally, we are equally threatened by predatory private equity firms (like Mitt Romney's Bain Capital) that kill jobs and weaken our economy.
These crooks enrich themselves by dissolving domestic companies into their own bank accounts. Bain Captial did this to Toys R Us in the year 2000, and we are now seeing the final outcome. The con men come in posing as physicians who can heal an ailing company's flu, then they drain most the company's net worth into their own coffers, and send it back out into the world as a terminally ill patient saddled with unpayable debts. Years later, when the company dies of its illness (as Toys R Us just did from the debts that Bain Capital burdened it with), the malpracticing doctors have all skipped town and shirk the blame.
Yes, all of this is perfectly legal under our nation's brilliant laws, which are designed to facilitate the 1%'s ability to prey upon the 99%, and divvy up the spoils with the likes of China and Russia. Unfortunately, some voters are gullible enough to believe that yet another con man (Donald Trump) can solve these systemic problems. You can blame them for being naive, but you can't blame them for being desperate.
19
Stop with blaming Amazon. This is the fault of Mitt Romney and his ilk at Bain and the other hedge funds looting brick and mortar companies of their assets.
17
First, I’m not sure what the upset is here. Big box retailers are headed the way of the coal industry, and good riddance to both. Cutting out the middle man will be a boon to consumers.
Second, I don’t understand the point of this article: we’re mad at private equity firms that made a bad purchase, effectively rescuing the previous lenders and owners who were also committed to this obviously bad strategy? Are we mad at the lenders, some of whom are ordinary people who hold bonds here, who want to get paid back? People also buy their homes with debt which they service with their income; should we be angry at people who take mortgages because sometimes housing prices go down? Should we be angry at banks that want you to pay your mortgage?
If it made economic sense for Toys R Us to invest in its stores or its online presence I can promise you KKR et al would: these guys are no fools and know plenty about this business.
If you are pining for the toy store of your youth, go visit your local toy store — if it exists — and put your money where your mouth is instead of hopping on Amazon and saving yourself money and time. You won’t.
It is easy to forget that Toys R Us was the “evil juggernaut” once, not Amazon.
14
KKR are no fools about extracting money and leaving the company with unjustified debt.
1
Excellent post. Your points are all correct including the fact that the PE owners would have done what was necessary to make the business work if that were possible. It never ceases to amaze me the inaccurate potshots that the media and others take at private equity and hedge funds. It also never ceases to amaze me that there is so much ignorance in the U.S. regarding business and even more so, capitalism.
2
What is “unjustified debt”? Debt is not given out for fun or for free: lenders provide debt only if they are being fairly compensated and therefore these lenders had the expectation the company could bear this debt load. Additionally, no PE shop would take out debt beyond the value of the company, as the eventual bankruptcy would wipe their equity check with it: all parties are aligned in their interests here.
In retrospect the lenders and KKR et al were wrong, but at the time people did not view the amount of debt here as unreasonable. Hindsight is 20/20.
Toys R Us folds while Pets R Us thrives. Curious.
And every year the private equity players received bonuses..... they should be clawed back.
4
No, Toys"R"Us does not reveal what a threat Amazon is. What Toys"R"Us reveals is that if a bunch of financial robber barons buy the company where you work making all former C-suite executives wealthy, and then saddle your company with hundreds of millions of borrowed money to make *them* wealthy, then you better jump ship because this debt will be an albatross that will not allow your company to compete against any other well managed business, brick and mortar, or online.
6
TRU could have survived if not for the crushing debt that limited the company's ability to creative respond to the Amazon challenge and made the company as a whole fragile. Amazon had a lot less to do with TRU's demise than the financiers who bought TRU, and in the process saddling the company with huge debts. Those same financiers subsequently bled it for their monetary gain until it was so fragile it was in no position to weather a bad holiday season. The leverage buyout team made lots of money, the employees lost their jobs, and consumers lost one more brick and mortar store. Once again, Wall Street wins while the rest of the country looses. This is a failure of our modern capitalist system.
4
I was kind of hoping for an explainer piece about financial engineering here. Maybe a graphic showing where the money comes from (lenders and PE firms?), where it goes after the deal is made, and where it ends up when the whole thing collapses, and who’s left holding the bag?
7
Tom, this isn’t a mystery. The PE shops bought the company with 80% debt and 20% equity. They paid themselves some advisory fees / dividends (same thing) over time, but the big return would have come from the sale of the company after making enough cash flow to pay down some of the debt on the company.
In this case the value of the company fell to the point that the debt is no longer worth 100 cents on the dollar anymore. No one is left holding the bag: the lenders will likely inherit what is left of the company and restructure the debt so that the company carries less debt than it currently has if TRU is a going concern; if not, the company’s assets will be liquidated and the proceeds will go to pay down the debt holders in the order of their security.
That’s the whole “engineering.” People have bought assets with debt for millennia. The only difference is our lawyers have gotten a bit better.
I think the writers of the article are performing a disservice by claiming the failure of TRU is due to Amazon and/or Walmart. Retail will always have competition.
The real culprit here is another Bain and co leverage buy-out. They dump all the debt on the company being purchased. TRU could not compete fairly when it has to manage a huge debt.
It should be illegal.
5
But then think about where most of the borrowed money went. Sure, the PE firms took fees & dividends. But most of the money went to buy out the old equity owners of TRU. So if there had been no LBO, then it would be the shareholders taking the loss, instead of the lenders. TRU would eventually have gone bust no matter what, so what's the difference?
Amazon isn't killing retail, but rather reordering it. If you want to be a retailer today and still be in business tomorrow, do it online and from home. Become an Amazon Partner. Learn to live with the bear, otherwise expect to be eaten by it.
7
Maybe...and have a neighborhood shop to serve that niche customer who will pay a bit more for quality items that they can examine in person.
That's why independent booksellers are making a comeback around here. Shoppers want an experienced hand to give advice. And some of those independents also sell via Amazon.
A leveraged buyout by a private equity fund. The biggest financial scams of the 21st century. I cringe every time I hear that Bain Capital is involved.
7
This is a complicated story, involving a relentless, monopolist, vampire squid in Amazon, predatory private equity (thanks, Mitt!), poor management, and changing markets. But in the end, tens of thousands of people will lose their jobs. Since these people are not in manly, iconic occupations like coal mining, no one will care, and no elected officials will take up their plight.
2
Perhaps private equity and hedge funds (here Bain, Kravis & Vornado) should be forced to fire the same number of employees as those at Toys R Us who will lose jobs when it closes. But there are never consequences for the guys who structure these self-serving risky deals & pay lower taxes than the rest of us. Congress is about to make such gambling even easier for financial firms. Shameful.
4
Another example of failed economic policy, or lack of economic policy. You can blame this on your high school economics class that preaches the mythical supply and demand curve. The only purpose of this class is to blind the public from the atrocities committed on Wall street. Economics isn’t about mysterious curves, it’s about profits.
Here is how it works. Firm A (or private equity group) buys all the stock of Firm B. Magically the price of the purchase shows up on the balance sheet labelled intangible assets. Balance sheets are not supposed to reflect future earnings, however corruption in the accounting profession changed the “standard practice”. See accounting research study #10. This was made worse by the Supreme Court when they ruled in 1993 that certain intangibles could be depreciated for tax purposes. Congress piled on with the omnibus reconciliation act that allowed ALL intangibles to be depreciated for tax purposes – robbing the commonwealth of American Citizens.
If American Citizens knew “The Truth About Economics” is about profits, not mythical markets, perhaps we would all know better. Find my book, it is a good read.
1
Can i find your book on Amazon?
1
You are ignoring the elephant in the room. TRU is not liquidating because of LBOs, or private equity, or the ability to depreciate intangibles for tax purposes. TRU is liquidating because it is one of many old school, brick & mortar retailers that are dinosaurs in the modern economy.
American companies gave up the fight for bricks and mortar long ago. Going to an actual to store to shop has been an eroding 'pleasure' each year. Stores stopped stocking their shelves with adequate numbers and choice years ago.
Why bother? They knew the consumer would just order online what they could not find on the shelf. In the chicken and egg debate, stores gave up and fueled the self sabotage.
And companies like Amazon acted like heat seeking missiles offering more choice, better prices and free shipping. Shopping malls are dying slow deaths.
Having been involved with Private Equity investors who took out Tech company private the model has not changed. Float high debt, in our case $3 Bil, pay yourself a nice dividend every year- $250 Mil, saddle the company with interest expense then cut costs and invest little - hurting moral. Then attempt to flip to cash rich, high stock value company in a few years. Yes if it works then investors make out but losers are customers and employees who get short stick. Directors and Boards should wake up to this scam and not jump into bed with these people using the excuse of maximizing stock holder value every time the pitch is made. It's all not Amazon fault!
2
Toys are us was a big contributor to the demise of so many "Ma and Pa" businesses, it is almost financial karma that even bigger online and box store sales should end it's run.
3
ToysRUs was back on the 80s-90s the so-called category killers. They dominated toys by putting out of business small retailers while Wall Street was cheering. Now they are getting a taste of there own medicine. Hard to feel sorry for them. Their employees is a different story, they are the most affected.
3
The article claims that the $5 billion debt was never paid off, but that the company had paid $400 million per year in interest - in other words they did paid off the $5 billion (12 x $400 million) but the onerous interest rate was so high that the principle remained intact.
This is a case of greed and drive-by capitalism. By now the private equity firm(s) that did this have dusty trophys (they call them tombstones) sitting in the partners offices commemorating all the money they made on the deal, and in the real world the true cost of their adventure has finally come due.
3
Do that same math re your mortgage and get back to us. Add up all your monthly payments until your mortgage is paid off and tell us how many times you could have paid off the principal.
Was Toys R Us stuck in the old inner suburban malls while it's customers moved further out or into the center city?
This is a wonderful opportunity for specialized toy stores to rise. I always found Toys R Us to be frustrating for the lack of variety and originality. Huge aisles of cheap, China made garbage. Bring back toy stores that have original, one of a kind toys. These type stores used to flourish in small shopping areas. As for the baby stores, they were filled with rough, Chinese made clothing that I would not want next to a baby's skin. Baby furniture stores offer a big opportunity here. Lets forget Amazon. People grow weary of waiting for packages to arrive and then it isnt what the vendor said it was and more and more, Amazon is leaving its customers at the mercy of vendors.
16
It’s going to be a Brave New World. The only brick and mortars that’ll be viable in the next decade are restaurants, convenience stores, hospitals and slimmed versions of department stores - all others will become electronic. Even automotive stores like Auto Zone are endangered. I recently had to buy DOT 4 Brake Fluid which was surprisingly out of stock at Auto Zones (for some vendor related reasons), but it wasn’t out of stock at Amazon. As a Prime member it was in my mailbox 2 days later.
1
Private equity, not Amazon, is the real problem in America. Private equity is ruining companies in every industry. As Martin Sheen said in the movie "Wall Street" "the rich have been doing it to the poor since the beginning of time." And at no time has it been worse since the evolution of private equity firms that raze companies just to enrich the few.
3
Private Equity is a function of Enormous Wealth.
We either deal with the enormous fortunes that have been piled up in the last generation, or become serfs on the plantation.
A relative reacted to me about this story in these terms:
"Well I can see this. Why travel to a huge dirty store with vacuous employees, where you can’t find anything or ask any questions, when you can sit in the comfort of your home, peruse the entire global offering, see how everything is rated, and have your item delivered the next day..."
I think that just about says it all.
4
I am sorry for the 33,000 employees who are out in the street. Hopefully, with 4.1% unemployment, many will get new jobs soon. I am not, however, sorry to see this company's management go down the tube. A few years back they brought a bunch of Indian IT personnel in to replace American workers, some with twenty years of company experience. Management was trying to out source its back office operations to India on the backs of loyal
American employees. Thy should have been prosecuted under existing U.S. laws. They were not. But the business cycle found an even better way to punish them.
2
No one that did the "Financial Engineering" is ever going to be hurting for money, or even a job. Only the workers. The financial "Wizards" have been living large and taking cash OUT for since 2005.
2
I’m a finance guy (formerly the treasurer of a large publishing company) and in my opinion “financial engineering” as it applies to Toys R Us and other companies has been the scourge of American business. Loading up a company with debt in order to line the pockets of investors has proven time and again to be a receipt for failure. Financial leverage is a tool that if used judiciously can help a company grow. In the case of leveraged acquisitions it is the kiss of death.
4
This article assigns blame incorrectly. It's private equity that's causing companies like Toys "R" Us and IHeartMedia to fail by loading them up with debt. Toys "R" Us would have posted a hefty profit in 2017 if it hadn't had to pay $400 million in interest payments. The Washington Post has a much better explanation of what happened ("Analysts: Toys R Us might have survived if it did not have to deal with so much debt.")
Whatever happens now, expect Bain Capital to walk away from this mess with a tidy profit. The destruction of a viable company in order to turn a profit is not a defect of the private-equity strategy - it's a feature.
2
It is no surprise to me that the company has gone under. Over the years I have tried to no avail to find quality merchandise there for my children, then grandchildren. All I found was plastic nonsense. Maybe the same junk is being sold by Amazon and other online companies, but at least buyers won't have to roam through rows and rows of plastic, throw-away garbage their children should not be in contact with anyway.
4
Not everything that happens is because of Amazon. Businesses used to go bankrupt in the days before Amazon came along as well.
Changing buyers and changing tastes combined with the ridiculous debt doomed TRU. Sixteen years ago, Thomas the Tank Engine was the happening thing in our house along. TRU had a variety of train tables and tracks to choose from and I could see them displayed. I can't imagine buying them online. But, I'm sure now I would do just that for convenience sake.
I don't think my kids, now in in their twenties, would have the patience for shopping at a store like TRU.
1
The real problem is that the private equity owners of Toys-R-Us won even though the retailer will be liquidated. They kept paying themselves bonuses and dividends which got their original investment and more out while saddling the retailer with debt. This is not real capitalism where value is created, this is just crony vulture capitalism where you destroy real businesses while coming out ahead. The buyers original plan was to do an IPO of this debt laden disaster so that they could wring more money out and let this go bankrupt letting public shareholders go down with it. There should be laws where dividends and management fees are clawed back where company is being run into the ground deliberately.
1
As a former federal bank regulator, I reviewed dozens of leveraged buy-outs. They almost always end the same way: the big banks make huge fees, and the debt-holders (often pension plans, university endowment funds, and individuals) take substantial losses. The private equity firms buy-out companies, financing the deal with massive debt, quickly recoup their investment by stripping cash out of the balance sheet, then close stores and factories, lay off employees, terminate pension plans and reduce health benefits, and finally force the company into bankruptcy. The big banks love it, because they can make more fees on the bankruptcy refinancing. The Federal Reserve turns a blind-eye to the corrosive effect on the economy in deference to the robber barons.
Private Equity is a cancer on the U.S. economy.
2
Wall Street has always been a wealth extractor, not a wealth creator. And then to add insult to injury they play the extortion racket when they themselves are about to go under and force taxpayer bailouts for themselves. The clueless ignorant politicians believe them and bail them out. Now, the big banks are even bigger. Next time, we need to let them fail and go through whatever pain we have to in order to get rid of them. Its the small and mid-sized banks that main street needs. With no implicit bailout guarantee, banks will have better risk management.
1
Are we seeing the end of going out shopping? It wasn't just buying something. It was going to a glittering mall, people watching, getting pizza slices and slurpies, and just walking around window shopping. It was the whole experience. Now it's being replaced by a few clicks. As Mr. T says, So sad.
Changing times. I've always thought that the retail markup at Toys r Us was ridiculous, I never understood why there was such a premium on their toys. A much more aggressive online strategy would have likely thwarted Amazon and Walmart a little bit but inevitably another retail giant is dead. People are pointing fingers at the Private Equity firms and sure they are part of the equation but holding on to their brick and mortar stores, not venturing into other lines, not investing enough in digital and poor management is what killed them. Also, I didn't see anything about the "resale" market, like Craig's list and Kijiji, I wonder if that is a factor in toys as well.
1
Amazon is crushing traditional retail. They just swallow up everything. Maybe its time to look at breaking them up.
1
These captains of finance built a smoking hole in the ground where there was once a thriving business. For their effort, they awarded themselves hundreds of millions of dollars in skimmed profits and undeserved tax credits.
Job creators indeed.
1
The incompetent senior management is more to blame than anyone else. Like Sears and K-Mart, this retailer and its strategy looks today like it did 2 decades ago, all the while the "Toys" management was giving themselves big bonuses. Not a surprise that Amazon (the new evil empire) and Walmart (for the longest time) brought Toys to its inevitable end.
1
The article is accurate but not telling the whole story. Virtually all USA retailers of medium and large size are NOW bought by private equity investors (it started in the early 90s)
and their STANDARD PRACTICE is
1. to cut the quality of the merchandise offered
2. raise the prices
3. bleed the retailer of assets over several years
4. close stores
5. and then eventually sell it off when there is nearly nothing left of the company.
It works profitably for the equity firms so they keep doing it. Time is on their side.
Companies that come to mind are Eddie Bauer and GAP which are hanging on to this day with reduced stores == but consumers that once liked those stores stay away from the high prices and cruddy merchandise.
Remember in the 90s when it was a big deal to buy "local retail" to stop Walmart and Amazon? And how it was somehow "honerable" to pay local retail tax because Amazon was not fighting fair. No one talks about that anymore because all once is really doing buying local is supporting private equity firms and cruddy merchandise and prices that seem too high for what one is getting.
1
Someday Amazon will fail. and facebook. and google.
it may be a hundred years from now but it will happen.
otherwise we might as well just sit in bed all day and work remotely and buy thiings delivered by robots. that's not living.
it used to be fun to shop in ToysRus when my kids were young.
There used to be a small family owned toy store in my neighborhood where we all shopped. The shop was filled to the rafters with toys and strollers, cribs—anything a parent would need.
Toys r Us forced them out of business. I don’t care about Toys r Us.
37
OK. There used to be a small family owned candlestick maker in my neighborhood. The shop was filled with the most beautiful candles you could imagine. There was ample space up front for us to tie up the horses while we shopped, and we would often stop by the cooper next door to have our barrels repaired. Thomas Edison and the aluminum can forced them both out of business...
1
It doesn't sound to me as though this was a test of private equity. It sounds as though there was no need for all those expensive stores when people just buy stuff on Amazon.
I and millions of other customers want to be able to walk into the convenience store and buy a gallon of milk, rather than ordering it online (after I've got enough on the order, and scheduled to arrive in three to five business days so that I can get free shipping). So there's a reason to have a convenience store on the corner, even in the age of Amazon. Toys? No. I'm just fine with the lump-order, wait-for-shipping approach to toys. So I'm not going to pay a price that includes the cost of having a building lit, heated, and staffed, the way I will with milk.
2
A test? private equity did what they always do. they load up debt and then the company fails.
1
But if the problem were limited to private equity, and the price they paid for TRU with borrowed money, then TRU would not be liquidating. If TRU still had a viable business model, somebody else would buy that business, albeit at a lower price. The fact that this is not happening here tells us that , private equity or not, this business was going to die.
A sad day. Retail is admittedly a challenge these days, but might Toys R Us have survived, had they been able to avoid turning themselves into a vehicle for private equity investors, becoming laden with debt and consulting fees in the process? It sure seems possible to me.
This is exactly the kind of leveraged buyout outcome that gives firms like Bain a bad name, and which may have cost Mitt Romney the presidential election. Cui bono?
1
It is easy to dismiss this as just another for-profit, abysmal business deal, but the ramifications of a once thriving, large company closing is more complex and disastrous for small communities.
Who will take over these imminently empty spaces? Who will the property owners rent the spaces to? Will they consider what the community might want? Will the new tenants be considerate neighbors?
When you have a small shopping center, as we do in Burbank, California, with a nice family restaurant, a fast food joint, a Hobby Lobby, an auto parts store, etc. you have to worry who the next tenant will be.
The failure of a company as large as Toys R Us isn't just about online shopping proliferating the market. It is about the new owners looting the company and caring nothing about the damage they've wrought.
This is about greed in its basest form and it is obscene in its disregard for the welfare of communities and their inhabitants.
16
"Who will take over these imminently empty spaces?"
A big question and you are right to raise it.
4
I heard an interesting line recently: The American market is a machine designed to turn citizens into consumers.
I have never been in a Toys ‘R’ Us store. I’ve also never been in a Walmart, K-mart, Home Depot, or ever ordered from Amazon, so I feel I’m an expert on the subject.
No one I know who needs these products, and cares about quality, finds this strange. I want to touch and sense the things I buy. I want to interact with the people I buy from, and know that they care about both their products and about me. This is why I shop locally at locally owned places, when I can.
I may pay more for a specific item, but I get more as well. And I don’t have closets and storage lockers filled with discarded junk that I bought because it was a good deal, and I was a good consumer. I would rather be a good citizen.
And now, with great irony, thanks to Amazon, I feel nostalgic for Toys ‘R’ Us.
13
With all due respect, if you've never been to a WalMart or other large retailer, and never purchased anything from Amazon, you're the farthest thing from an expert on retail sales that one could possibly imagine.
I prefer Toys R Us to Amazon (and its predatory model), but to be honest the stores weren't all that nice to shop in and seemed to feature the worst, media-driven junk toys.
The the store in Midtown, with the indoor Ferris wheel, was fun, if only for that reason! (Try doing that via Amazon!)
Here's hoping some good, well-stocked and well-staffed local stores can benefit from this -- and also help supply toys and such that are better quality and better-supported than Amazon's mass-market stuff!
5
Amazon provides the widest imaginable selection of goods, generally excellent prices, and first rate customer service. If that is a "predatory model," I say bring on the predators.
Actually, their "excellent" prices are generally matched (opr bettered!) by other online sellers. Check it out--i have since becoming an EX-Amazon customer! (see below)
And as for their "first rate customer service," I'd disagree--strongly! Try getting an answer to a question--I did and got the same essentially robo-reply non-answer over and over again.
And then (after about 10 e-mails!) they gave me an Amazon credit instead of a refund, because of some loophole fine-print in their "guarantee". (And don't even bother trying to get a sentient being on the phone!) And then Amazon had the effrontery to e-mail me: "consider yourself lucky that we've done this!"
TERRIBLE SERVICE.
And like most predatory monopolist-wannabes, once they drive competitors out of business, watch the prices soar!
And ask some booksellers, publishers, and authors about how Amazon coercively treats them!
1
Kids made Toys R Us special. I don't miss the brand per se but I do know that kids experienced true, unadulterated joy in those stores (and learned sometimes harsh lessons about saving/spending money...).
The exasperated parents, the messy shelves, the kids running around with joy or with tears in their eyes were all evidence of tiny little brains firing on all cylinders and experiencing life fully at that moment.
Call it consumerism or naked capitalism but it was a place where a parent could make a child happy in a way that quickly begins to disappear as they grow older. It feels good to be able to do that in such a way from time to time. Life for a kid can't be all about college entry preparation to become the next big tech/medicine/law entrepreneur.
The closing of Toys R Us is just another reminder of the unforgiving nature of the market and of time. It reminds me that kids grow old very quickly, that time doesn't stop for anyone, and that imagination is going by the wayside.
7
Toys 'R' Us did not go out of business with a loss of 30,000 working class jobs because of Amazon. It went out of business because of poor management that took on debt, not to improve the ability to gain more revenues, but for a leveraged buyout. Paying a $5 billion debt meant that the added expense was passed on to consumers, a "tax" that Amazon customers did not have to pay.
Don't blame Amazon for running their store well. Blame Toys 'R' Us for taking on the huge debt knowing that they would make toys more expensive.
I hope the existence of Amazon will put an end to this senseless raising the costs of goods sold through taking on needless debt that does nothing to increase sales. No longer can these 'taxes' be put on the consumer.
25
"It went out of business because of poor management that took on debt"
The company took on debt because ONLY AFTER the equity firm bought it up. It is a distinction you dont mention. Toys R Us might still be around if it wasnt bought.
5
@K Henderson:
Thank you for clarifying what I had intended to state which is that the problem was caused by the leveraged buyout. Had there been no leveraged buyout, Toys R Us would still be in business.
From a consumer perspective, the leveraged buyouts which increase debt and consumer prices from paying the debt don't make any sense.
2
Toys R Us is outdated and sells mostly low quality toys. Everything covered in characters marketed heavily from kids' programs and movies. Everything plastic. Everything promoting gender stereotypes.
Many parents today are more discerning and shop online or in small neighborhood toy stores, looking for higher quality alternatives (like Lottie dolls instead of Barbie or a bike that's just a bike and not a mobile advertisement for Paw Patrol).
I'm glad the toy industry marketing teams will have one less venue for peddling their flashy junk to our children.
6
“A private equity firm takes over a troubled company with the goal of sprucing up the strategy, cutting costs and overhauling the business over three or five years.“
That’s never the goal in these bust-outs. The goal is to loot the company to enrich the private-equity vultures.
77
Andy, sometimes it is the goal and is possible. Cutting costs can mean firing employees and degrading the business -- another form of looting -- but it need not.
Cutting Payroll is the quickest, most-short sighted way to improve quarterly reports for the stockholders. The customer experience is not even a consideration. Poorly trained, frequent turnover minimum wage employees, and far too few of them, means waiting in line to ask a question no one knows the answer to. Wandering the aisles looking for something while obnoxious, screeching "popular music" blares in the background, is not a pleasant experience. I wonder how many customers like myself endure the noise and frustration, find what they want, and end up leaving the store to order the same item on Amazon rather than wait another fifteen minutes in line to pay. Only high end chain stores like Nordstrom or Neiman Marcus still offer well-displayed merchandise, relaxing music and helpful, knowledgeable salespeople. I predict a renaissance of small, local toy stores where it is fun to shop.
20
Sure, it would be great to see that renaissance, not only in toy store but in other retail sectors as well.
The problem is that small stores can’t afford to buy product in quantity that give them breaks on wholesale prices. Another problem is retail rent isn’t cheap, especially in high-traffic areas. (Yep, greedy landlords.)
9
Don't hold your breath. Target, Walmart, Amazon and few other retail outlets, (some even farm implement stores), will benefit by TRU going under. Retail will never be what it was, and even the small, boutique stores will suffer because they'll have to charge more due to higher prices they have to pay to suppliers, and likely higher rents in upscale places. This new generation is all about convenience, not about shopping, that's something their parents and grandparents did. They order their clothing, food, household supplies and furniture online, and save their free time for their kids, working out and living life. Most women today are working outside the home, and have little free time to cruise whatever malls are left. The big challenge will be what to do with all the empty retail space.
3
In my local shopping center (where I buy my groceries) there is a small toy store. It stocks kites, legos, baby gifts, interesting art toys. Whenever I need to buy a toy for a child, this is where I go -- not Amazon. Who knows if the price is competitive? I don't care. Sometimes I walk in there just to look around at the cool stuff. I hope that they are doing well. Oh, and they gift wrap for free too.
51
You are fortunate that you don't have to consider the cost of an item that you buy. Hopefully you are aware of the great good fortune you possess and that the vast majority of people in America are not in that position.
I am aware of my privilege and blessings.
I do not think that the prices in this store are so much more than in the bargain stores, and paying an extra $ or two may be a way of supporting a small business. I am willing to do that. My way of rebelling against this profit-over-people&quality culture that we are becoming.
1
Call this what it is. Financial looting. All part of what the .1% does.
From what the article says, immediately after the buy out the new private equity owners borrowed 80+% of the acquisition cost to pay themselves back and saddled the company with the debt. If as is typical practice over the years they then awarded themselves special fees and assessments and any other term they could dream up then they were able to get all of their purchase price back out and then some. It's likely the buyout from us made a profit on the deal. If the company happened to survive so much the better but if not, hey, thems the breaks.
77
Debt for equity swaps, the main business of KKR and Mitt Romney's Bain Capitol, have tax advantages that should have been reduced or eliminated in tax reform. The recent tax bill did nothing to address this matter, and so we can expect more failures from companies that use debt for equity swaps in the coming years.
In the case of Toys R Us, as this piece makes clear, the cash flow needed to service the debt prevented the company's management from making the investments needed to compete in the changing retail environment.
48
It was magical going into these stores as a kid three decades ago. I just wonder what will replace all these giant boxes littered throughout America. Are we just going to have a nation of ghost towns where these giant stores are filled by seasonal Halloween and Christmas junk stores?
5
Yes. And you can add to it a bunch of empty grocery stores, Barnes & Noble locations, restaurants and perhaps in the not so distant future, car dealerships.
2
A common story-saddles with huge debt from a private equity buyout, a company goes out of business. The private equity guys don't care because they got their money out early on.
43
I can promise you the “private equity guys” certainly care about having their equity wiped out. Secondarily, they also got destroyed on this deal. People don’t make profits and then get complacent in an industry where your goal is to earn 15% /year or investors start pulling out.
I can promise Mike P that, in general, the "private equity guys" are careful to extract their money early on. The collapse comes later, often after the business has been sold to gullible optimists.
What is the evidence that the private equity firms "got destroyed on this deal"? Numbers, please?
2
What Toys R Us was able to offer is still available at Target, Walmart and other big box stores. It's not like Amazon is the only alternative now.
4
I always thought that this company had much too many stores for such a limited type of merchandise - toys!
2
Toys R Us specialized in boring, media-driven toys that were unimaginatively displayed, poorly stocked, and more expensive than just about anywhere else. So, buh bye.
Yes, I bet there is a market for a real toy store - maybe we'll go back to the fun privately owned stores that bought interesting and unusual toys that lasted. Meanwhile, peruse your local museum's gift shop.
9
What a bizarre comment. If you didn't like Toys'R'US, that's fine. But a lot of people did and still do now. It's a bit self-congratulatory to take an article about finance and use it as a way to gloat about the demise of a chain some people love while lecturing others on how they should share your shopping habits. "Go to a museum gift shop?" Talk about giving credence to the "coastal elites out of touch with middle America" narrative.
1
Please someone fill this vacuum! I loved taking my kids where they could see and touch the toys. It is so much more exciting than looking at pictures online and then getting something that is much bigger or smaller than you expected. Kids are hands on and tactile, Toys R Us provided a visceral experience that cannot be matched by online buying. Walmart and Target don’t have anything near the selection or brands that Toys R Us did. Our town lost a small mom and pop toy store a few years ago, too. They had toys out that kids could try out. We need brick and mortar for toys - and shoes (another pet peeve where it is hard to find kid shoe stores to measure feet and try different fits)! Here is to hoping someone figures out how to make that experience profitable.
13
Probably a corner of Whole Foods. Another corner will have ye old physical book store.
1
Perhaps people were trying them out and then ordering them from somewhere else.
3
All this nostalgia for Toy R Us. Even when I was kid in the 70's outside Philadelphia I resented them moving in and crowding out the better quality local stores. Here in Santa Cruz they helped close down the locally owned businesses and now they have closed in turn. Now ALL we have is Amazon, really.
33
Private equity and financial engineering, regardless of industry, have always been about making short-term gains as opposed to building companies and value.
88
Agreed. When or if the company goes belly-up, taking a share of what is left is helps to make more. Bit like vultures with wallets.
1
It’s a sad day. Back in the 1980s my wife and I always bought toys for our son at TRU. There are so many happy memories. Sorry to see it go, but in this age, retail is difficult at best. But the happy memories will always be there.
3
I loved TRU as a kid it was the go to place to spend all your birthday money loot. But as a parent I found it disappointing. The stores were huge, but had a poor selection. It was impossible to find what you were looking for, and good luck finding an employee. What products they did have were overpriced. It seemed a waste of time to go to the store wander around to find something that wouldn’t be there and to pay more money for whatever you could find. Nostalgia is great, but TRU counted on it for too long and failed to make the kids that loved them into parents that needed them.
33
I haven't been in a Toys R Us for years but I grew up with it being a magical place in my life as a kid. When you would walk into those stores the smell and all the sensory stimulation from aisle upon aisles of toys was just the best thing in the world. You literally never wanted to leave. I don't expect you can get that feeling ordering a toy from Amazon on a laptop or a smartphone. It is a sad day and truly the end of an era.
9
You couldn't get that feeling from an underfunded and outdated Toys R Us store anymore, either.
2