Toys 'R' Us IPO Is No Kids' Stuff

After years of speculation, Toys 'R' Us has filed documents with the Securities and Exchange commission to go public in the New York Stock Exchange under the ticker symbol "TOYS."

The documents did not put a value on the IPO, but noted that shares issued to executives in October under a compensation plan sold for $28 each. Some early reports have said the initial offering could raise around $1 billion; the company was worth $6.6 billion when it went private in July 2005 in a leveraged buyout.

Investors had been waiting for an IPO in the five years since the toy store chain was taken private by a group led by Bain Capital Partners, Kohlberg Kravis Roberts & Co. and Vornado Realty Trust. By that time, the company had fallen on hard times, a victim of cut-rate competition from discounters, especially Wal-Mart Stores (WMT), which stole price-conscious shoppers.

Realizing that competing against big boxes on price alone was a losing game, a new management team shrunk the store base by closing locations and combining many Toys 'R' Us and Babies 'R' Us stores into one-stop superstores for children's supplies. The company also added more exclusive merchandise.

Toys 'R' Us has been very aggressive over the last year, acquiring other toy retailers and expanding into new concepts. In February 2009, the company bought the online toy store eToys.com, followed in May by the acquisition of specialty toy store FAO Schwarz. It also expanded into mall retailing during the holidays with Toys 'R' Us Express pop-up stores and added exclusive FAO Schwarz merchandise in stores to counter the $10 toys being offered at Wal-Mart and other discounters.

Aggressive Strategy Has Worked

The company claims the strategy is responsible for a sharp uptick in profits, including pre-tax earnings growth of 55% between fiscal year 2005 and the recently completed fiscal 2009. Net earnings for the fiscal year ended January 30 were $312 million, a 43.1% increase over the last fiscal year and far better than the $384 million loss in fiscal 2005, when the company went private.

But Toys 'R' Us is still hobbled by a large debt load, which is meant to be lightened by the proceeds of the IPO. According to the filing with the SEC, the company has total debt of $5.2 billion, including nearly $2 billion of which matures before the end of fiscal 2012.

As the prospect of an economic recovery draws investment dollars to merchants, IPOs and takeovers of retail companies have picked up considerably since the middle of last year. KKR completed an IPO of Dollar General Corp. (DG) in November, raising over $445 million; apparel retailer Charlotte Russe went private in a $380 million sale to investment group Advent International in August; Vitamin Shoppe (VSI) also went public in October, with an IPO worth about $195 million and teen apparel retailer rue21 (RUE) also went public in an offering that raised over $115 million. More recently, Walgreen Co. (WAG) acquired New York drugstore chain Duane Reade for $1.08 billion in February, one day after apparel retailer Express filed papers for an IPO worth $220 million.