UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
Commission file number 1-11609
TOYS "R" US, INC.
Incorporated pursuant to the Laws of Delaware
Internal Revenue Service - Employer Identification No. 22-3260693
461 From Road, Paramus, New Jersey 07652
(201) 262-7800
The registrant (1) has filed all reports to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports) and(2)
has been subject to such filing requirements for the past 90 days.
285,560,366 shares of the registrant's Common Stock were outstanding on
August 26, 1997.
<PAGE>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets...........................2
Condensed Consolidated Statements of Earnings...................3
Condensed Consolidated Statements of Cash Flows.................4
Notes to Condensed Consolidated Financial
Statements......................................................5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.................................................6
PART II - OTHER INFORMATION...................................................9
SIGNATURES...................................................................11
1
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
<CAPTION>
ASSETS August 2, August 3, February 1,
1997 1996 1997
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents ..................... $ 226.5 $ 319.5 $ 760.9
Accounts and other receivables ................ 158.3 135.7 142.1
Merchandise inventories ....................... 2,972.4 2,710.9 2,214.6
Prepaid expenses and other current assets ..... 72.0 104.5 42.0
Total current assets .................... 3,429.2 3,270.6 3,159.6
Property and equipment, net and other assets ...... 4,563.0 4,312.5 4,498.6
Goodwill, net ..................................... 360.4 -- 365.0
$ 8,352.6 $ 7583.1 $ 8,023.2
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings ......................... $ 857.3 $ 1,151.5 $ 303.5
Accounts payable .............................. 1,675.6 1,534.5 1,346.5
Accrued expenses and other current liabilities 382.2 345.1 720.0
Income taxes payable .......................... 66.0 6.4 170.7
Total current liabilities .............. 2,981.1 3,037.5 2,540.7
Long-term debt .................................... 905.2 713.5 908.5
Deferred income taxes.............................. 231.0 238.7 222.5
Other liabilities ................................. 115.6 143.8 160.9
Stockholders' equity .............................. 4,119.7 3,449.6 4,190.6
$ 8,352.6 $ 7,583.1 $ 8,023.2
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In millions except per share data)
<CAPTION>
13 Weeks Ended 26 Weeks Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales ......................................... $ 1,989.0 $ 1,736.4 $ 3,913.1 $ 3,381.9
Costs and expenses:
Cost of sales ................................ 1,354.7 1,177.3 2,681.0 2,301.7
Selling, advertising, general &
administrative ............................... 501.7 444.7 980.8 867.3
Depreciation and amortization ................ 55.5 48.9 111.7 97.9
Other charges ................................ -- 55.0 -- 55.0
Interest expense - net ....................... 19.3 22.4 35.5 42.2
1,931.2 1,748.3 3,809.0 3,364.1
Earnings (loss) before taxes on income ............ 57.8 (11.9) 104.1 17.8
Income tax expense (benefit) ...................... 21.1 (4.4) 38.0 6.6
Net earnings (loss) ............................... $ 36.7 $ (7.5) $ 66.1 $ 11.2
Earnings (loss) per share ......................... $ .13 $ (.03) $ .23 $ .04
Weighted average number of common
and common equivalent shares....................... 289.4 273.7 288.9 276.1
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
26 Weeks Ended
August 2, August 3,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 66.1 $ 11.2
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 111.7 97.9
Deferred income taxes 8.6 5.5
Changes in operating assets and liabilities:
Merchandise inventories ................................ (757.8) (706.0)
Accounts payable and other operating liabilities ....... (44.3) 110.7
Other operating assets (63.5) (23.8)
Net cash used in operating activities .................... (679.2) (504.5)
Cash flows used in investing activities:
Capital expenditures, net ................................... (251.3) (179.9)
Cash flow from financing activities:
Short-term borrowing, net ................................... 553.8 815.8
Long-term borrowings ........................................ 8.7 --
Exercise of stock options ................................... 39.0 10.1
Long-term debt repayment .................................... (130.9) (11.9)
Share repurchase program .................................... (88.1) --
Net cash provided by financing activities ................ 382.5 814.0
Effect of exchange rate changes on cash and cash equivalents 13.6 (12.8)
Cash and cash equivalents:
(Decrease)/increase during period ........................... (534.4) 116.8
Beginning of period ......................................... 760.9 202.7
End of period ............................................... $ 226.5 $ 319.5
Supplemental disclosures of cash flow information:
Income taxes paid ........................................... $ 122.1 $ 129.2
Interest paid ............................................... $ 57.1 $ 55.8
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Reporting
The interim financial statements are unaudited and are subject to
year-end adjustments. However, in the opinion of management, all known
adjustments (which consist primarily of normal recurring accruals) have
been made and the interim financial statements present fairly the
consolidated financial condition and operating results for the
unaudited periods. Because of the seasonal nature of the Company's
business, results for interim periods are not indicative of results to
be expected for the fiscal year.
2. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on January 31, 1998, the last day of the Company's fiscal year. At that
time, the Company will be required to change the method currently used
to compute earnings per share and restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. There is no impact
on primary earnings (loss) per share for the three and six month
periods ended August 2, 1997 and August 3, 1996. The impact of
Statement No. 128 on the calculation of fully diluted earnings (loss)
per share for these periods is not material.
3. Other Charges
On July 12, 1996, an arbitrator rendered an award in favor of Yusuf
Ahmed Alghanim & Sons, W.L.L. ("Alghanim") and against the Company and
awarded Alghanim $46.4 million plus interest from December 1994. This
award was rendered in connection with a dispute between Alghanim and
the Company involving rights under a 1982 license agreement for toy
store operations in the Middle East. Accordingly, the Company has
recorded a provision of $59.5 million during fiscal 1996 representing
all expected costs in connection with this matter. The Company believed
that the findings of the arbitrator were not supported by the evidence
presented in the case and contested this award in the United States
District Court. That motion was denied on December 13, 1996, and the
arbitration award was confirmed. The Company filed an appeal with
the United States Court of Appeals for the Second Circuit. On September
10, 1997, the Second Circuit affirmed the District Court's decision.
4. Other Matters
See Part II - Item 1. - Legal Proceedings - 1).
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Total sales increased 15% to $2.0 billion for the second quarter ended August 2,
1997 as compared with $1.7 billion for the second quarter ended August 3, 1996.
For the first six months of 1997, net sales increased 16% to $3.9 billion as
compared with $3.4 billion for the first six months of 1996. Excluding the
impact of foreign currency, total sales increased 16% in the second quarter and
18% for the first six months of 1997, as compared with the same periods in the
prior year. The increase in total sales is attributable to the increase in
comparable store sales during these periods and the Company's continued store
expansion, including the acquisition of Baby Superstore on February 3, 1997.
Comparable USA toy store sales increased by 4% and 6% for the second quarter and
first six months of 1997, respectively, as compared with the same periods in
1996. These increases were primarily driven by strong sales of video products as
well as action figures, plush and outdoor playsets. Internationally, the Company
experienced a comparable toy store sales increase in local currency for the
second quarter and first six months of 1997 as compared with the same periods in
1996, including double digit comparable store sales increases in both Canada and
the United Kingdom. The sales increases internationally were primarily driven by
the continued strength of the video game business as well as innovative
marketing and advertising programs. The Company's Kids "R" Us division
experienced a comparable store sales increase in the second quarter, while
comparable store sales decreased for the first six months of 1997. The Babies
"R" Us division experienced comparable store sales decreases for the second
quarter and the first six months of 1997, primarily due to the expected impact
during the transition of the Baby Superstore locations to Babies "R" Us. The
transition of Baby Superstore locations to Babies "R" Us is now complete.
Cost of sales, as a percentage of sales, increased by .3% and .4% for the second
quarter and first six months of 1997, respectively, as compared with the same
periods in 1996. These increases were due primarily to the negative impact on
the sales mix caused by the increased sales of video hardware merchandise,
somewhat offset by lower sales of consumables.
Selling, advertising, general and administrative expenses as a percentage of
sales decreased by .4% and .5% for the second quarter and first six months of
1997, respectively, as compared with the same periods in 1996, primarily as a
result of continued expense control and sales leveraging.
Depreciation and amortization increased by $6.6 million and $13.8 million for
the second quarter and first six months of 1997, respectively, as compared with
the same periods in 1996, primarily as a result of the Company's continued store
expansion, as well as goodwill amortization relating to the acquisition of Baby
Superstore.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(continued)
The arbitration award (See footnote 3 to the condensed consolidated financial
statements) had a material effect on the results of operations for both the
second quarter and the six months ended August 3, 1996. The award reduced
earnings per share by $.13 for both the second quarter and six months ended
August 3, 1996. Excluding the impact of the award, earnings per share for the
second quarter and the six months ended August 3, 1996 would have been $.10 and
$.17, respectively.
Net interest expense decreased by $3.1 million and $6.7 million for the second
quarter and first six months of 1997, respectively, as compared with the same
periods in 1996, due in part to the closing of a medium-term $325 million
financing in the second half of 1996 which replaced borrowings carrying higher
interest rates, as well as the benefits of the 1995 worldwide restructuring
program. Foreign currency exchange did not have a material effect on net
earnings for the second quarter or the first six months of 1997.
Financial Condition
The Company's 1997 expansion plans include adding 19 toy stores in the United
States, all utilizing the "Concept 2000" store design. The Company also plans to
add 3 new Kids "R" Us stores and 20 new Babies "R" Us stores in the United
States this year. Internationally, the Company will add 46 new toy stores
including 16 franchise stores. In addition, the transition of Baby Superstore
locations to Babies "R" Us is now complete.
In 1996, the Company remodeled 3 toy stores in the United States to its "Concept
2000" format. In 1997, an additional 56 stores are being remodeled to this new
store format. Store remodeling plans for 1998 and beyond are being worked on
but have not yet been finalized.
Short-term borrowings, net of investments decreased by $201.2 million at August
2, 1997 as compared with the August 3, 1996 due primarily to the refinancing of
short-term debt with a medium-term $325 million financing in the second half of
1996. Accordingly, the current ratio has improved to 1.15 to 1 at August 2,
1997, as compared with 1.08 to 1 at August 3, 1996.
Long-term debt repayments of $130.9 million in the first quarter of 1997 were
due primarily to the retirement of convertible debt assumed with the acquisition
of Baby Superstore.
The Company repurchased 3.1 million shares of its common stock through its share
repurchase program for $88.1 million during the first six months of 1997. The
Company repurchased 24.4 million shares of its common stock for $782 million
since the $1 billion share repurchase program was announced in January 1994.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(continued)
Annual capital expenditures for new and existing facilities are estimated to be
approximately $600 million for 1997. Cash requirements for operations, capital
expenditures, lease commitments and the share repurchase program will be met
primarily through operating activities, borrowings under the $1 billion
revolving credit facility, issuance of short-term commercial paper and bank
borrowings by foreign subsidiaries.
The Company's restructuring program action plan is substantially complete and
all restructuring reserves are considered adequate to cover all estimated costs
of the restructuring program. The Company is currently working with its
franchisee in the Netherlands to meet the ownership requirements established by
the Environmental Economic Union.
Weighted average common equivalent shares increased to 288.9 million for the six
month period ended August 2, 1997 compared with 276.1 million from the same
period a year ago, due primarily to 13 million treasury shares of Company common
stock issued in connection with the Company's acquisition of Baby Superstore on
February 3, 1997.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
1) On May 22, 1996, the Staff of the Federal Trade Commission
(the "FTC") filed an administrative complaint against the
Company alleging that the Company is in violation of Section 5
of the Federal Trade Commission Act for its practices relating
to warehouse clubs. The complaint alleges that the Company
reached understandings with various suppliers that such
suppliers not sell to the clubs the same items that they sell
to the Company. The complaint also alleges that the Company
"facilitated understandings" among the manufacturers that such
manufacturers not sell to clubs. The complaint seeks an order
that the Company cease and desist from this practice. The
matter was tried before an administrative law judge in the
period from March through May of 1997. A decision is
forthcoming.
Since the filing of the FTC complaint, several class
action suits have been filed against the Company, alleging
that the Company has violated certain state competition laws
as a consequence of the behavior alleged in the FTC complaint.
These class action suits seek damages in unspecified amounts
and other relief under state law.
The Company believes that both its policy and its conduct in
connection with the foregoing are within the law and plans to
contest these actions vigorously. The Company also believes
that these actions will not have a material adverse effect on
its financial condition or results of operations.
2) On July 12, 1996, an arbitrator rendered an award in favor
of Yusuf Ahmed Alghanim & Sons, W.L.L. ("Alghanim") and
against the Company and awarded Alghanim $46.4 million plus
interest from December 1994. This award was rendered in
connection with a dispute between Alghanim and the Company
involving rights under a 1982 license agreement for toy store
operations in the Middle East. Accordingly, the Company has
recorded a provision of $59.5 million during 1996 representing
all expected costs in connection with this matter. The Company
believed that the findings of the arbitrator were not
supported by the evidence presented in the case and contested
this award in the United States District Court. That
motion was denied on December 13, 1996, and the arbitration
award was confirmed. The Company filed an appeal with
the United States Court of Appeals for the Second Circuit. On
September 10, 1997, the Second Circuit affirmed the District
Court's decision.
9
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company's stockholders
on June 4, 1997 all of management's nominees for director were
elected.
Management's nominees for director received the
following votes:
Number of Shares Withheld Votes
Robert A. Bernhard ............232,531,059 21,079,182
RoAnn Costin ................. 232,661,312 20,949,929
Michael Goldstein ............ 232,658,439 20,952,802
Shirley Strum Kenney ..........232,667,154 20,944,056
Charles Lazarus ...............232,626,605 20,984,636
Norman S. Matthews ............232,655,621 20,955,620
Howard W. Moore ...............232,671,667 20,939,574
Robert C. Nakasone ........... 232,638,005 20,973,236
Arthur B. Newman ..............232,665,523 20,945,718
Also approved by the following votes were:
(i) a proposal to approve the Amended and Restated Toys
"R" Us, Inc. 1994 Stock Option and Performance Incentive Plan
(the "1994 Plan"). 235,308,817 shares were voted in favor of,
16,319,713 shares were voted against, and 939,450 shares
abstained from, such proposal; and
(ii) a proposal to approve the 1996 grant of
Restoration Options to each of Michael Goldstein and Robert C.
Nakasone under the 1994 Plan. 227,441,090 shares were voted in
favor of, 24,126,126 shares were voted against, and 994,764
shares abstained from, such proposal; and
(iii) a proposal to approve the Amended and Restated Toys
"R" Us, Inc. Management Incentive Compensation Plan.
244,724,464 shares were voted in favor of, 6,911,498 shares
were voted against, and 932,018 shares abstained from, such
proposal; and
(iv) a proposal to approve the Amended and Restated Toys
"R" Us, Inc. Non-Employee Directors' Stock Option Plan.
242,100,198 shares were voted in favor of, 9,525,155 shares
were voted against, and 942,627 shares abstained from, such
proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: September 12, 1997 Toys "R" Us, Inc.
-----------------
(Registrant)
s/ Louis Lipschitz
------------------
(Signature)
Louis Lipschitz
Executive Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Condensed Balance Sheets and Consolidated Condensed Statements
of Earnings as reported on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-02-1997
<PERIOD-END> Aug-02-1997
<CASH> 226,500
<SECURITIES> 0
<RECEIVABLES> 158,300
<ALLOWANCES> 0
<INVENTORY> 2,972,400
<CURRENT-ASSETS> 3,429,200
<PP&E> 5,450,200
<DEPRECIATION> 1,364,900
<TOTAL-ASSETS> 8,352,600
<CURRENT-LIABILITIES> 2,981,100
<BONDS> 905,200
0
0
<COMMON> 30,000
<OTHER-SE> 4,089,700
<TOTAL-LIABILITY-AND-EQUITY> 8,352,600
<SALES> 3,913,100
<TOTAL-REVENUES> 3,913,100
<CGS> 2,681,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 111,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,500
<INCOME-PRETAX> 104,100
<INCOME-TAX> 38,000
<INCOME-CONTINUING> 66,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,100
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
