Toys R Us was once a feared competitor, the top toy retailer in the U.S. with a seemingly unassailable lead as a "category killer" in the toy sector. 20 years later the company filed for bankruptcy due to the loss of vendor support in the months before the 2017 holiday season. The decline of Toys R Us offers several lessons, foremost among them that no company, regardless of the strength of its position, can afford to be complacent in the face of shifting industry dynamics.

1. Toys R Us
From Dominance to Bankruptcy
April 2018

2. “All men make mistakes, but a good man yields when he
knows his course is wrong, and repairs the evil.The only
crime is pride.”
‒ Sophocles,Antigone
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3. • In 1997, Toys R Us was the #1 toy retailer in the U.S., having
beaten the other “category killer” specialty retailers and still
maintaining a lead over Walmart, Target, and other general
retailers.
• In September 2017, the company was forced to file for
bankruptcy when vendor concerns gave rise to a liquidity
crisis.
• Today, the company is winding down all U.S. operations.
Success to Failure in 20Years
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5. Revenue
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Revenue
($MMs)
Country Amount % of Total
United States 7,131 61.8%
Japan 1,272 11.0%
Europe 1,163 10.1%
Canada 821 7.1%
UK 553 4.8%
China and Southeast Asia 375 3.2%
Australia 207 1.8%
Licensing revenue 18 0.2%
Total 11,540 100.0%
Breakdown for FY16
$12,361
$11,802
$11,540
FY 14 FY 15 FY 16
Information as of the fiscal year ended January 31, 2017

6. Domestic & International Breakdown
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Domestic International
% of sales
Information as of the fiscal year ended January 31, 2017

7. Global Footprint
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Store Breakdown for FY ended January 28, 2017
Store Type Domestic International Consolidated
Traditional Toy 358 574 932
SBS 212 208 420
Baby 223 14 237
Long-Term Express 48 16 64
Outlet 38 0 38
Total 879 812 1,691
Excluded in Store Count
Licensed 0 257 257
Temporary Express 10 29 39
Information as of the fiscal year ended January 31, 2017

8. Strategy
• The company under-invested in
ecommerce capability
• Management never fully
embraced ecommerce, and then
omni-channel, as the true future
of the company.
Leverage Communication
• Toys R Us was highly levered
• High levels of debt, a result of
the 2005 buyout, reduced the
company’s ability to invest at a
crucial period.
• Stakeholders (particularly
vendors) panicked
• It was clear that the company
would need to restructure at
some point, and absent clear
signals from management,
vendors forced the issue.
Causes of Failure
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9. Leverage
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($MMs)
Facility Amount
French real estate credit facility 48
Incremental secured term loan facility, due fiscal 2018 125
Second incremental secured term loan facility, due fiscal
2018 62
7.375% senior notes, due fiscal 2018 209
$1.85 billion secured revolving credit facility, expires fiscal
2019 465
Senior unsecured term loan facility, due fiscal 2019 874
Tranche A-1 loan facility, due fiscal 2019 272
Propco II Mortgage Loan, due fiscal 2019 489
Giraffe Junior Mezzanine Loan, due fiscal 2019 78
Secured term B-4 loan facility, due fiscal 2020 982
UK real estate credit facility, due fiscal 2020 323
Toys-Japan 1.85%-2.18% loans, due fiscals 2019-2021 44
12.000% Taj senior secured notes, due fiscal 2021 577
8.750% debentures, due fiscal 2021 22
Finance obligations associated with capital projects 179
Capital lease and other obligations 12
Total debt 4,761
Less: current portion (119)
Total Long-term debt $4,642
Information as of the fiscal year ended January 31, 2017

10. ▪ Review of the company’s Fixed Charge Coverage Ratio in recent years highlights the strain that a highly
leveraged capital structure placed on the company.
▪ In only two years of the last five did the company generate sufficient operating income to fund debt
service.
Debt Service
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Period Ended 1/31/17 1/30/16 1/31/15 2/1/14 2/2/13
Adj. earnings (loss) from continuing operations 628$ 553$ 379$ (150)$ 808$
Fixed Charges
Interest expense 457 429 451 524 480
Interest capitalized during period - - - - 1
Interest portion of rental expense 159 166 180 190 235
Total Fixed Charges 616 595 631 714 716
Ratio of Earnings to Fixed Charges 1.02x 0.93x 0.60x (0.21x) 1.13x
($MMs)
Information as of the fiscal year ended January 31, 2017

11. David Johnson
Email: david@abraxasgp.com
Ph: 312-505-7238
Twitter: @TurnaroundDavid
David Johnson, founder and managing partner of Abraxas Group, has a 20-
year track record of driving organizational change. David has served as an
interim executive or financial advisor to dozens of middle market
companies in turnaround and restructuring situations.
Throughout his career, David has demonstrated a commitment to thought
leadership, with numerous speaking engagements and articles on the topics
of change management, performance improvement, restructuring,
turnaround, and value creation to his credit.
David received his MBA from the University of Chicago and completed his
undergraduate studies at Fairleigh Dickinson University.
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