The Decline of Toys R Us...What Happened?

[Music] the big news story of the week in the business world is that Toys R Us has filed for bankruptcy I've been getting quite a few requests to make a video about it and I completely agree this is a terrific subject to talk about so I dropped everything I was doing and dove right into it keep in mind that this video is being made the same week as the announcement and it's sometimes hard to see the full picture from such a close distance so don't be too harsh if you're watching this sometime in the future and I say something that sounds a little foolish so what's going on with Toys R Us if you're like me you had no idea they were in any kind of trouble and were shocked by the news and I'm guessing your next thought was a quick judgment that it must be a result of the internet taking sales away from the store locations I would even bet you clicked on this video anticipating to hear that and I don't necessarily disagree with that conclusion but I guarantee that what's happening with Toys R Us right now runs much deeper than losing sales to Amazon in 1948 a man named Charles Lazarus opened a baby furniture store called children's bargain town the company started selling toys and the demand for them grew mr. Lazarus being an astute businessman noticed that furniture is pretty sturdy and long-lasting but toys tend to be the exact opposite the focus of the business soon became toys and in 1957 Toys R Us was born anyone know where the name Toys R Us comes from well obviously conveys that they're in the toy business but any idea as to why those three words are combined in such a strange way and why it uses the letter R well let me repeat the founders name Charles Lazarus did I just blow your mind another fun fact any guesses as to why the r is backwards well Charles Lazarus was a big fan of the band Korn okay one of those two facts was true and the other was a lame joke you decide which is which a few years later Jeffrey the giraffe was created as the company's mascot he was originally named dr. G wrath so I'm sure you can understand why they renamed him in 1978 Toys R Us went public meaning anyone could become a partial owner through the purchase of some stock five years later they made a logical expansion what the creation of kids R Us a clothing store for kids I actually don't care for this name as much because the name Toys R Us identifies what they sell whereas kids R Us identifies their target customer but kids are also the target customer for Toys R Us my phone would have been to name it clothes R Us since people recognize the R Us part as targeting kids the clothes part lets you know what they sell and it follows the same naming format established by Toys R Us but I suppose most company names don't describe what they sell anyways so I'm sure there were other factors responsible for its demise in 2003 but I can't get into them right now this video is about Toys R Us not kids R Us I've already spent too much time on kids R Us 1996 mark the beginning of Babies R Us which despite having the same naming issues as kids R Us still stands today in 2005 the company was taken off the stock market and transformed into a private company when it was purchased in a leveraged buyout and in September of 2017 Toys R Us filed for bankruptcy this is a company that began 60 years ago with roots going even further back a company that became the standard for Toys any time within the last 30 years including today if Family Feud were to survey 100 people and ask them to name a toy store the number one answer on the board would be Toys R Us and as of this week this company has filed for bankruptcy so how on earth did this happen the short answer is that they have too much debt but that's a no brainer of course they have too much debt why else would they file for bankruptcy see so then in my mind the real question becomes how did they get so much dead so let's try to figure out this one together Dora the Explorer style here's a graph that shows their long-term debt over the past 14 years so which year do you think we should further investigate to try to find out where all this debt came from well it certainly appears that something happened between 2005 and 2006 and I actually already told you what it was in 2005 the company went private through a leveraged buyout a leveraged buyout is when you buy a company using a bunch of debt I can best explain it through an example say I wanted to buy Toys R Us the selling price is 10 million dollars but I only have 1 million dollars so I go to the bank and try to get a loan for the remaining 9 million but it turns out I need a pretty good collateral in order to take out a 9 million dollar loan so I think a minute about what I have that's of any value my car probably won't cover it oh I know how about Toys R Us if I get the loan I'll own Toys R Us and that can be my collateral so I get the loan and now I have two things I own Toys R Us but I also have 9 million dollars in debt but really Toys R Us has nine million dollars in debt this is an incredibly simplified version of what happened in 2005 but it didn't cost 10 million dollars it cost 6.6 billion dollars most of which was paid for through loans that went right on the balance sheet of Toys R Us so that explains the huge debt increase now at this point I'm sure you're saying well that sounds risky and you're completely right think of it as taking out a mortgage to buy a house once you do that you better have a reliable source of income because as soon as the cash flow stops you're liable to lose your home same with Toys R Us as long as the cash flow situation is fine there's no worries but once it slows down well here we are this is from the website investopedia leveraged buyouts have had a notorious history especially in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired companies this was mainly due to the fact that the leverage ratio was nearly 100 percent and the interest payments were so large that the company's operating cash flows were unable to meet the obligation I think this reinforces what I just said and just in case you need more proof here it is from toys-r-us themselves in their annual report from a few years back our substantial indebtedness could have important consequences including making it more difficult for us to make payments on the debt as our business may not be able to generate sufficient cash flows from operating activities to meet our debt service obligations here's my point when that leveraged buyout occurred 12 years ago it was well known that one of the big risks of doing it was potential bankruptcy I know as outsiders this crept up on all of us but for anyone on the inside or anyone following their financial condition over the years this was no surprise to continue with my analogy toys-r-us has taken a pay cut and are now having trouble making their mortgage payments but now we have a second question on the table why aren't they able to make their payments if everything went according to plan there would be no trouble right now so why aren't they generating enough money this is where our minds always jump straight to blaming the internet and I can't disagree with that it's happening everywhere but in defense of Toys R Us they do seemingly have a healthy internet presence on their website they talk about how they launch toysrus.com almost 20 years ago and how it became one of the fastest growing sites in the toy and baby products shopping categories and that Toys R Us com is one of the most visited sites in their category and I see no evidence against these claims also in 2007 they acquired eToys comm and toys comm which further strengthened their online presence I know Amazon is darn near impossible to compete with but as far as I can tell Toys R Us hasn't exactly been ignoring their online component of their business another thing to point to our stores like Walmart and Target that offers similar if not the same type Roddick's at lower prices not to mention the convenience of picking them up during your routine shopping trips maybe it's just because I'm older now but Toys R Us doesn't seem to have the same weight at once had meaning before it felt like the place to go for toys and now I see it as the expensive place to go for Toys something that I'm inclined to blame for all of this is the decline of toy popularity in general just think about it kids aren't spending the better part of their day playing with toy trucks and yo-yos it's all about technology video games are awesome today it's no longer pong and Dig Dug it's breath of the wild and gta5 games that could be played for weeks or months before getting tired of them I defy you to play pong for any longer than a few minutes and of course the apps and games on the phone why spend a ton of money on Legos when most apps are free the bottom line is that Toys R Us isn't doing great but they're also not doing terrible sure they have their trouble selling toys and trust me the troubles were there long before the leveraged buyout but it was the debt that resulted from the buyout that amplified everything back to the analogy you took a pay cut yes that's bad news but the fact that you have the mortgage payments to keep up with is what makes it devastating as for the future of Toys R Us it's hard to predict anything with much accuracy when they're in the middle of a bankruptcy but my guess is that they'll stick around it is the type of bankruptcy where you restructure your debt and stay in business and as far as I can tell if this debt is managed a little maybe they could have some freedom to improve upon their faults and become more competitive maybe work on ways to lower prices create a more fun environment for kids whatever it takes let me know in the comments what you think about all this I identified a few reasons as why they're struggling with their sales but I'm sure there's many more if you have any theories I'd like to hear them and just an aside there were so many interesting things about Toys R Us as far as their history and their evolution that I elected to exclude from this video so if you think I neglected to mention something I'm sure you're right maybe when Toys R Us either makes a recovery or fails altogether I'll make a new video about it and have a place to include it all but for now go to that comment section and let me know your thoughts about everything that's going on I'd like to hear what you have to say thank you for watching [Music] you [Music]

Channel: Company Man

Views: 2,349,500

Rating: 4.837276 out of 5

Keywords: Toys R Us, Bankruptcy, Toys R Us Bankrupt, What Happened, Debt, Toys

Id: 4JYUo9WKkao

Length: 12min 16sec (736 seconds)

Published: Wed Sep 20 2017

Reddit Comments

[u/lnpxt]

This is the most annoying and information sparse video I have ever seen. Not to mention that he assumes the viewer is an absolute moron so he feels compelled to explain each and every single detail.

[u/[deleted]]

http://www.ecommercetimes.com/story/49188.html

Toys R Us and Amazon had a partnership but that partnership went south. Amazon was able to dissect Toys R Us's operations to the extent that they could out compete them. A lot of people decided not to partner with Amazon due to the potency of Amazon being able to break apart their models. Circuit City was another that Amazon partnered with around the same time that went bust. Partnering instead of acquiring was Toysrus's biggest mistake as partnering only improved a major competitor.

[u/ben_gardners_boat]

It's like someone took 30 seconds of a CGP Grey video and stretched it into 12 minutes.

[u/Pratt2]

Amazon. /thread

[u/johnn48]

The most astute observation is that kids aren't playing with toys nowadays. I see toddlers playing with moms tablet or phone. It's an interactive audio visual experience that the parents can feel okay with not like the TV.

[u/CatchingRays]

Duds R Us