Paul Ziobro and Lillian Rizzo:
Toys ‘R’ Us Inc. told employees Wednesday the struggling big-box retailer will sell or close all its U.S. stores, a collapse that threatens up to 33,000 American jobs in the coming months.
Outside the U.S., the chain has another roughly 800 stores. Altogether, court papers show Toys “R” Us has roughly 1,600 stores globally, with approximately 60,000 employees. That number reaches more than 100,000 during peak holiday season.
This place that I think almost everyone has good memories of was driven to waste by vultures who burdened it with debt. They bought Toys ‘r’ Us with loaned cash and put that debt onto the company after the purchase. I didn’t even know you could do that until I read about it last year, but this story from Marielle Segarra explains it best:
And to really get what happened with Toys R Us, you need to understand how these private equity purchases work. They rely on something called a leveraged buyout.
“Leverage just means you’re using lots of debt,” said Eileen Appelbaum, co-director of the Center for Economic and Policy Research.
If a private equity firm wants to buy a company, it’ll put up a small portion of the money. Then it’ll go to the bank and borrow the rest.
The key? “They put the debt on the company they buy,” Appelbaum said.
That’s what they did to Toys “R” Us in 2004. Three businesses bought the company, loaded it up with debt, the workers there have been paying it off ever since. Jeff Spross:
Whatever magic Bain, KKR, and Vornado were supposed to work never materialized. From the purchase in 2004 through 2016, the company’s sales never rose much above $11 billion. They actually fell from $13.5 billion in 2013 back to $11.5 billion in 2017.
On its own, that shouldn’t have been catastrophic. The problem was the massive financial albatross the leveraged buyout left around Toys ‘R’ Us’ neck. Just before the buyout, the company had $2.2 billion in cash and cash-equivalents. By 2017, its stockpile had shriveled to $301 million, even as its debt burden ballooned from $2.3 billion to $5.2 billion. Meanwhile, Toys ‘R’ Us was paying $425 million to $517 million in interest every year.
The employees will probably lose their jobs, the toy makers might not have a good place to get toys in front of people anymore and could go out of business and that could end up being a lot more people losing their jobs for no good reason, just because the vultures swooped in to get a turnaround that wasn’t achievable while paying off the debt.
The CEO, David Brandon, makes bank anyway. JC Reindl:
Brandon enjoyed a total $11.25 million CEO compensation package in 2017, a year in which Toys R Us filed for Chapter 11 bankruptcy amid more than $5 billion in debt. That pay package included Brandon’s $2.8 million retention bonus, paid five days before the retailer’s Sept. 19 bankruptcy filing, to help with continuity through the process.
I’ve got a toy suggestion, it’s not my idea, but I think that Brandon and the executive teams at Bain and the others might want to try it out. Could save any future company they want to work with.