Toys “R” Us Reports Q2 2016
Toys “R” Us, Inc., reported financial results for the second quarter ended July 30, 2016. Consolidated same stores sales increased by 0.5 percent and operating earnings improved to $18 million from $15 million. In addition, the company successfully reached an agreement to refinance all of its Toys “R” Us, Inc., 2017 notes and a portion of its 2018 maturities.
“We are pleased with our successful refinancing activities which will further strengthen the company’s financial foundation. This will enable us to continue to execute on our operational turnaround and compete in what continues to be a challenging retail environment,” said Dave Brandon, chairman and CEO, Toys “R” Us, Inc. “As we enter the critical holiday season, we are focused on creating a world class shopping experience and ensuring that we consistently deliver the products our customers want, regardless of when and how they want to shop with us.”
Second Quarter Highlights
- Consolidated same store sales increased 0.5 percent. International grew by 1.2 percent, driven by strength in the Canada and Asia Pacific markets. Domestic same store sales were flat with improvements in the seasonal and core toy categories, offset by decreases in the entertainment and baby categories. Domestic e-commerce sales were up 15 percent.
- Consolidated net sales were $2,282 million, a decrease of $11 million compared to the prior-year period. Excluding a $13 million favorable impact from foreign currency translation net sales declined by $24 million. The decrease was mainly attributable to Domestic store closures, which included the last FAO Schwarz store and the Times Square flagship store, partially offset by International same store sales growth.
- Gross margin dollars were $862 million, a decline of $13 million compared to the prior-year period. Excluding a $4 million favorable impact from foreign currency translation, gross margin dollars decreased by $17 million. Gross margin rate was 37.8 percent, a decrease of 40 basis points. Domestic gross margin rate declined by 70 basis points, primarily due to an increase in e-commerce sales coupled with lowering the free shipping threshold. International gross margin rate remained consistent with prior year.
- SG&A was $783 million, a decrease of $13 million compared to the prior-year period. Excluding a $3 million unfavorable impact from foreign currency translation, SG&A decreased by $16 million, largely due to a decline in flagship store occupancy costs.
- Operating earnings were $18 million, compared to $15 million in the prior-year period. Excluding a $2 million favorable impact from foreign currency translation, International segment operating earnings improved by $11 million, mainly due to an increase in gross margin dollars and a reduction in operating expenses. Domestic segment operating earnings declined by $18 million, mainly as a result of reduced gross margin dollars. Corporate overhead decreased by $8 million.
- Adjusted EBITDA for the quarter decreased by $1 million to $121 million, compared to $122 million in the prior-year period.
- Net loss improved by $4 million to $95 million, compared to $99 million in the prior-year period.
Liquidity and Capital Spending
The company, including Toys “R” Us-Delaware, Inc., ended the second quarter with total liquidity of $1 billion, which was comprised of cash and cash equivalents of $420 million and availability under committed lines of credit of $571 million. Toys “R” Us-Delaware, Inc., ended the quarter with $557 million of liquidity, which was comprised of cash and cash equivalents of $174 million and availability under its revolving line of credit of $383 million.
Through the end of the second quarter, capital spending was $95 million, compared to $82 million in the prior year, an increase of $13 million.
As previously announced, on August 16, 2016, the company completed the offering to exchange the outstanding 10.375 percent senior notes due 2017 and 7.375 percent senior notes due 2018 for new 12 percent senior secured notes due 2021. On August 26, 2016, additional New Secured Notes were issued in a private placement. Altogether, $583 million of New Secured Notes were issued and $110 million in cash consideration was paid. As a result of the exchange and private placements, the company will redeem all of the outstanding 2017 Notes and $192 million of the 2018 Notes, with the remaining net cash proceeds available for general corporate purposes, including repayment of other indebtedness.