Toys"R"Us, Inc. Reports Financial Results for Third Quarter 2012

Toys"R"Us, Inc. Reports Financial Results for Third Quarter 2012

Domestic Operating Earnings Rise and Gross Margin Rate Improves Over Prior Year

Consolidated Net Loss Unchanged versus Prior Year, Excluding the Effect of Expenses Associated with Refinancing

Balance Sheet Strengthens on Increase in Equity and Decrease in Debt Over Prior Year

WAYNE, N.J.--(BUSINESS WIRE)-- Toys"R"Us, Inc. today reported financial results for the third quarter ended October 27, 2012.

Jerry Storch, Chairman and CEO, Toys"R"Us, Inc., stated, "Our primary focus during the third quarter was making strategic preparations for the important holiday season. We believe the new programs we've introduced such as Free Layaway, Price Match Guarantee, Hot Toy Reservation and our strengthened omnichannel offerings, including Ship from Store, have benefitted our customers and provided even more reasons to shop with us. In addition, we are confident that our inventory levels of the must-have toys will provide us with a strong in-stock position in the weeks leading up to Christmas continuing to make Toys"R"Us the toy destination for families."

"The team continues to focus on margin rate improvements, while effectively managing inventory levels and reducing expenses. This has resulted in a gain in operating earnings in the U.S. for each quarter of this year. The challenging economic environment in Europe and Japan continues to have a negative impact on operating earnings on an international basis. However, we are pleased with the strong momentum from our locations in China and Southeast Asia where positive performance is helping to offset this weakness."

Third Quarter Highlights

  • Net sales were $2.6 billion, a decrease of 3.4% or $91 million versus the prior year. The decline in net sales for the quarter was primarily attributable to a decrease in comparable store net sales, as well as a foreign currency translation impact of $30 million. Comparable store net sales were down 4.1% in the Domestic segment, partially driven by the impact of this year's earlier layaway program (which defers the recognition of sales into the period when the customer picks up the order), as well as a somewhat less intensive promotional calendar during the quarter. Comparable store net sales were down 4.6% in the International segment, reflecting weakness in Europe and Japan.
  • The Learning category continued to improve, generating net sales growth of 1.3%. The Entertainment category (including electronics, video game hardware and software) was down 7.0%, reflecting ongoing weakness in the global video game business.
  • Gross margin as a percentage of net sales was 37.1%, an increase of 0.6 percentage points versus the prior year as a result of margin rate improvements within product categories and improvements in sales mix away from lower margin products. Within the Domestic segment, gross margin as a percentage of net sales increased 1.0 percentage point, while the International segment decreased by 0.2 percentage points versus the prior year. Gross margin dollars were $967 million, compared to $986 million for the prior year. Foreign currency translation decreased gross margin dollars by approximately $12 million.
  • Selling, general and administrative expenses ("SG&A") decreased by $11 million to $962 million, compared to $973 million in the prior year. The inclusion of our China and Southeast Asia business added $21 million to this year's SG&A, while the impact of foreign currency translation reduced it by $12 million.
  • Operating loss was $75 million, which was unchanged from the prior year. The Domestic segment operating earnings increased by $9 million.
  • Adjusted EBITDA1 for the quarter was $31 million, compared to $36 million in the prior year, bringing the Adjusted EBITDA to $298 million through the third quarter of fiscal 2012, compared to $305 million in the prior year.
  • Interest expense was $135 million, an increase of $29 million versus the prior year. The increase in interest expense was primarily due to the issuance of the senior notes due fiscal 2017, and the repayment of the outstanding principal amount on the company's senior notes due fiscal 2013, which included a make-whole premium of approximately $18 million.
  • Net loss was $105 million, compared to $93 million in the prior year. The single largest element of this decline was the increase in interest expense due to the make-whole premium noted above. Excluding the after-tax impact of the expenses associated with the refinancing in the quarter, the net loss would have been unchanged versus the prior year.

Liquidity and Capital Spending

The company ended the third quarter with approximately $2.3 billionof liquidity, including cash and cash equivalents of $399 million and unused available committed lines of credit of $1.9 billion. Cash used in operating activities was $449 million lower than the prior year for the year to date, demonstrating the company's continued focus on managing working capital more efficiently. Long term debt at the end of the third quarter of fiscal 2012 (including current portions) declined by $387 million versus the same time last year. Shareholders' equity was $261 million, up $51 million from the prior year.

The company's capital expenditure program is a key component of its long-term integration strategy for its toys and juvenile products businesses and its commitment to enhancing its systems. Through the end of the third quarter of fiscal 2012, the company invested $215 million primarily to finance construction of new stores, remodel existing stores (including conversions), as well as improve its information technology and logistics systems, compared to $266 million in the prior year.

Further information regarding the company's financial performance in the third quarter of fiscal 2012 is presented in its quarterly report on Form 10-Q, which was filed with the Securities and Exchange Commission on December 7, 2012.

About Toys"R"Us, Inc.

Toys"R"Us, Inc. is the world's leading dedicated toy and juvenile products retailer, offering a differentiated shopping experience through its family of brands. Merchandise is sold in 875 Toys"R"Us and Babies"R"Us stores in the United States and Puerto Rico, and in more than 645 international stores and over 150 licensed stores in 35 countries and jurisdictions. In addition, it exclusively operates the legendary FAO Schwarz brand and sells extraordinary toys in the brand's flagship store on Fifth Avenue in New York City. With its strong portfolio of e-commerce sites including,, and, it provides shoppers with a broad online selection of distinctive toy and baby products. Headquartered in Wayne, NJ, Toys"R"Us, Inc. employs approximately 70,000 associates annually worldwide. The company is committed to serving its communities as a caring and reputable neighbor through programs dedicated to keeping kids safe and helping them in times of need.

This press release, the other reports and documents that we have filed or may in the future file with the Securities and Exchange Commission and other publicly released materials and statements, both oral and written, that we have made or may make in the future, may contain "forward looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such disclosures are intended to be covered by the safe harbors created thereby. These forward looking statements reflect our current views with respect to, among other things, our operations and financial performance. All statements herein or therein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases, such as "anticipate," "estimate," "plan," "project," "expect," "believe," "intend," "foresee," "forecast," "will," "may," "outlook" or the negative version of these words or other similar words or phrases. These statements discuss, among other things, our strategy, store openings, integration and remodeling, the development, implementation and integration of our Internet business, future financial or operational performance, projected sales or earnings per share for certain periods, comparable store net sales from one period to another, cost savings, results of store closings and restructurings, outcome or impact of pending or threatened litigation, domestic or international developments, amount and allocation of future capital expenditures, growth initiatives, inventory levels, cost of goods, selection and type of merchandise, marketing positions, implementation of safety standards, future financings and other goals and targets and statements of the assumptions underlying or relating to any such statements.

These statements are subject to risks, uncertainties, and other factors, including, among others, the seasonality of our business, competition in the retail industry, economic factors and consumer spending patterns, the availability of adequate financing, access to trade credit, changes in consumer preferences, our dependence on key vendors for our merchandise, political and other developments associated with our international operations, costs of goods that we sell, labor costs, transportation costs, domestic and international events affecting the delivery of toys and other products to our stores, product safety issues including product recalls, the existence of adverse litigation, changes in laws that impact our business, our substantial level of indebtedness and related debt-service obligations, restrictions imposed by covenants in our debt agreements and other risks, uncertainties and factors set forth under Item 1A entitled "RISK FACTORS" of our Annual Report on Form 10-K filed on March 21, 2012, as well as our other reports and documents filed with the Securities and Exchange Commission. In addition, we typically earn a disproportionate part of our annual operating earnings in the fourth quarter as a result of seasonal buying patterns and these buying patterns are difficult to forecast with certainty. These factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this report. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update these statements in light of subsequent events or developments unless required by the Securities and Exchange Commission's rules and regulations. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

1 A detailed description and reconciliation of EBITDA and Adjusted EBITDA, and management's reasons for using these measures, are set forth at the end of this press release.

13 Weeks Ended39 Weeks Ended
October 27,October 29,October 27,October 29,
(In millions)201220112012


Net sales$2,609$2,700$7,773$7,984
Cost of sales 1,642  1,714  4,791  4,995 
Gross margin 967  986  2,982  2,989 
Selling, general and administrative expenses9629732,7472,755
Depreciation and amortization9799297299
Other income, net (17) (11) (40) (31)
Total operating expenses 1,042  1,061  3,004  3,023 
Operating loss(75)(75)(22)(34)
Interest expense(135)(106)(350)(346)
Interest income 4  2  12  6 
Loss before income taxes(206)(179)(360)(374)
Income tax benefit 101  86  159  180 
Net loss$(105)$(93)$(201)$(194)
October 27,January 28,October 29,
(In millions)201220122011
Current Assets:
Cash and cash equivalents$399$701$432
Accounts and other receivables236253257
Merchandise inventories3,5512,2323,626
Income tax receivable2501251
Current deferred tax assets127128110
Prepaid expenses and other current assets 140 122 168
Total current assets4,7033,4374,844
Property and equipment, net3,9594,0524,088
Deferred tax assets269279213
Restricted cash193016
Other assets 527 596 557
Total Assets$9,926$8,842$10,105
Current Liabilities:
Accounts payable$2,226$1,447$2,201
Accrued expenses and other current liabilities876916837
Income taxes payable375141
Current portion of long-term debt 1,030 315 163
Total current liabilities4,1692,7293,242
Long-term debt4,6934,8465,947
Deferred tax liabilities155154130
Deferred rent liabilities354338327
Other non-current liabilities250243249
Temporary equity - noncontrolling interest4429-
Total stockholders' equity 261 503 210
Total Liabilities, Temporary Equity and Stockholders' Equity$9,926$8,842$10,105
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39 Weeks Ended
October 27,October 29,
(In millions)20122011
Cash Flows from Operating Activities:
Net loss$ (201)$ (194)
Adjustments to reconcile Net loss to Net cash used in operating activities:
Depreciation and amortization297299
Amortization of debt issuance costs2627
Deferred income taxes1323
Changes in operating assets and liabilities:
Accounts and other receivables141
Merchandise inventories(1,330)(1,474)
Prepaid expenses and other operating assets7(3)
Accounts payable, Accrued expenses and other liabilities773497
Income taxes payable and receivable(227)(261)
Net cash used in operating activities(623)(1,072)
Cash Flows from Investing Activities:
Capital expenditures(215)(266)
Decrease in restricted cash111
Proceeds from sales of fixed assets1219
Purchases of long-term investments-(24)
Net cash used in investing activities