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Toys "R" Us' Supposed IPO: Don't Get Too Excited

Five years after riding to the rescue of Toys "R" Us with a $6.6 billion purchase, private-equity owners Kohlberg Kravis Roberts (KKR), Bain Capital and Vornado Realty (VNO) are reportedly looking to take the company public again with a $1 billion public stock offering. While the owners might like a cool billion to reduce the $5.5 billion in debt still weighing down the company's balance sheet, the company's current performance isn't quite ready for Wall Street. On the upside, the company is making money again, roughly $300 million last year, a nice turnaround from losing $387 million when KKR bought Toys in '05. Also, the competitive field has narrowed -- FAO Schwarz all but disappeared and KB Toys went bankrupt, with Toys "R" Us buying the brand name last year.

But the problems far outweigh the positives. Among the issues:

  • The company still has more than 1,500 stores, a count that has remained essentially unchanged since the KKR-led group acquired Toys "R" Us. Certainly there are some underachieving units yet to be shed. Store closures tend to generate big one-time lease write-off losses that are better accomplished privately than under the pressures of answering to public shareholders.
  • Toys "R" Us has performed a bit better lately, but it's not exactly a retail star. Sales at existing stores were still down 3 percent last year, at a time when many major retailers have bounced back and are seeing positive sales growth again.
  • The company's lukewarm performance and burdensome debt load mean its private shareholders' stock only recently acquired any value, which currently stands at a paltry $117 million. That's puny for a company with nearly $14 billion in annual sales -- i.e., not exactly a sign of a thriving business.
  • Finally, there's an overarching problem in trying to reintroduce this mature chain to the public markets: no growth story. Investors like companies that have a lot of upside potential, and it's hard to see much expansion in Toys "R" Us's future. It's already a global chain with little open territory left, and it's hemmed in on price by Walmart (WMT), which continues to dominate the category and drive prices down.
The chain does have one new initiative that seems to be helping -- combining Toys "R" Us and Babies "R" Us units to create megastores with more year-round traffic on the toy side. But the changeover is still in its infancy, rolled out to less than 100 stores. That doesn't make much of a dent in a chain this big.

So far, the company has been a bit mysterious about the combined "R" stores, saying just that they "performed well" and that it plans to add "more" this year. Toys has slowly rebuilt its cash to over $1 billion, so it has some money to spend on store remodeling. If the combined stores truly generate more sales and profits, Toys "R" Us could aggressively roll out this changeover to more stores, improve sales and earnings, and present a more enticing proposal for investors in a year or so. Photo via Flickr user fluzo