Toys “R” Us Reports Results for Third Quarter 2016
Toys “R” Us, Inc., reported financial results for the third quarter ended October 29, 2016. Consolidated net sales decreased 2.3 percent driven by softness in the entertainment category. Net loss narrowed by $11 million compared to the prior-year period. In addition, the company recently refinanced all of its 2017 debt and a significant portion of its 2018 maturities with the successful completion of the TRU Taj notes exchange in August and the Propco II CMBS and mezzanine financings in November, which will reduce annual interest payments by $12 million based on LIBOR rates as of October 29, 2016. “While many of our toy categories performed well, we experienced weak market conditions in the electronics and entertainment category and our baby business had a disappointing quarter,” said Dave Brandon, chairman and CEO, Toys “R” Us, Inc. “To be a successful specialty retailer, we must bring our stores to life and provide a world-class shopping experience for our customers. Our results this quarter are a reminder that we still have a lot of work to do in all aspects of our operations—both bricks and mortar stores and our webstore. However, our commitment to achieving our growth objectives is stronger than ever. As we enter into these final days of the holiday season, we are focused on delivering the best experience possible along every step of the customer journey while maximizing our financial performance.”
Third Quarter Highlights
- Consolidated net sales were $2,278 million, a decrease of $53 million compared to the prior-year period. Excluding a $22 million favorable impact from foreign currency translation, net sales declined by $75 million. The decrease was mainly attributable to a decline in Consolidated same-store sales and Domestic store closures, which included the Times Square flagship store.
- Consolidated same store sales decreased by 2.1 percent. Domestic declined by 1.9 percent primarily from decreases in the entertainment and baby categories, partially offset by improvements in the learning and core toy categories. International declined by 2.5 percent, driven by the Asia Pacific and Europe markets, partially offset by continued growth in Canada. Consolidated e-commerce sales were up 9 percent.
- Gross margin dollars were $821 million, a decline of $11 million compared to the prior-year period. Excluding a $7 million favorable impact from foreign currency translation, gross margin dollars decreased by $18 million. Gross margin rate was 36 percent, an increase of 30 basis points. Domestic gross margin rate remained consistent with the prior-year period, while International gross margin rate increased by 80 basis points led by margin rate improvements in the core toy category and sales mix away from lower margin entertainment products.
- SG&A was $835 million, an increase of $8 million compared to the prior-year period. Excluding a $6 million unfavorable impact from foreign currency translation, SG&A increased by $2 million, largely due to an increase in advertising expenses related primarily to the early release of the Big Book holiday catalog, partially offset by a decline in store operating costs from the closure of the Times Square flagship store.
- Operating losses were $31 million, a decline of $23 million compared to the prior-year period, driven mainly by a gain on the sale of the FAO Schwarz brand of $45 million. Domestic segment operating losses increased by $19 million, mainly as a result of reduced gross margin dollars. International segment operating earnings were flat.
- Adjusted EBITDA for the quarter decreased by $13 million to $21 million, compared to $34 million in the prior-year period.
- The above results produced a Net loss of $156 million, which was $11 million lower than the prior-year period of $167 million.
Liquidity and Capital Spending The company, including Toys “R” Us-Delaware, Inc., ended the third quarter with total liquidity of $1.3 billion, which was comprised of cash and cash equivalents of $420 million and availability under committed lines of credit of $841 million. Toys “R” Us-Delaware, Inc. ended the quarter with $799 million of liquidity, which was comprised of cash and cash equivalents of $189 million and availability under its revolving line of credit of $610 million. Through the end of the third quarter, capital spending was $174 million, compared to $139 million in the prior year, an increase of $35 million. As previously announced, on November 3, 2016, the company completed $512 million of CMBS financing and $88 million of mezzanine financing. The proceeds and a $51 million rent prepayment from Toys “R” Us-Delaware, Inc., along with cash on hand, were used to redeem all of the $725 million 8.5 percent senior secured notes due 2017 of Toys “R” Us Property Company II, LLC. As a result of this transaction, the company pushed out this debt maturity to 2021 and reduced annual interest payments by an estimated $22 million based on LIBOR rates as of October 29, 2016.