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 November 1, 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.
283,996,858 shares of the registrant's Common Stock were outstanding on
November 25, 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
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<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
<CAPTION>
November 1, November 2, February 1,
1997 1996 1997
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 282.6 $ 651.7 $ 760.9
Accounts and other receivables 173.6 152.7 142.1
Merchandise inventories 3,923.5 3,582.2 2,214.6
Prepaid expenses and other current assets 74.1 133.1 42.0
Total current assets 4,453.8 4,519.7 3,159.6
Property and equipment, net and other assets 4,676.9 4,401.8 4,498.6
Goodwill, net 358.2 -- 365.0
$ 9,488.9 $ 8,921.5 $ 8,023.2
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,260.9 $ 1,377.1 $ 303.5
Accounts payable 2,289.4 2,198.5 1,346.5
Accrued expenses and other current liabilities 488.3 428.1 720.0
Income taxes payable 54.2 -- 170.7
Total current liabilities 4,092.8 4,003.7 2,540.7
Long-term debt 901.2 1,028.3 908.5
Deferred income taxes 235.0 245.7 222.5
Other liabilities 129.3 146.7 160.9
Stockholders' equity 4,130.6 3,497.1 4,190.6
9,488.9 8,921.5 8,023.2
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
2
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<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In millions except per share data)
<CAPTION>
13 Weeks Ended 39 Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales.................................... $ 2,141.9 $ 1,883.0 $ 6,055.0 $ 5,264.9
Costs and expenses:
Cost of sales ...................... 1,455.5 1,280.4 4,136.5 3,582.1
Selling, advertising, general &
administrative ..................... 532.8 474.1 1,513.6 1,341.4
Depreciation and amortization ...... 59.4 51.4 171.1 149.3
Other charges ...................... -- -- -- 55.0
Interest expense - net ............. 22.3 24.2 57.8 66.4
2,070.0 1,830.1 5,879.0 5,194.2
Earnings before taxes on income ............. 71.9 52.9 176.0 70.7
Income tax expense .......................... 26.2 19.6 64.2 26.2
Net earnings .............................. $ 45.7 $ 33.3 $ 111.8 $ 44.5
Earnings per share .......................... $ .16 $ .12 $ .39 $ .16
Weighted average number of common
and common equivalent shares outstanding .... 288.9 278.7 288.7 277.0
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
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<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
39 Weeks Ended
November 1, November 2,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................... $ 111.8 $ 44.5
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization ........................... 171.1 149.3
Deferred income taxes.................................... 12.4 9.0
Changes in operating assets and liabilities:
Merchandise inventories ............................... (1,708.9) (1,581.3)
Accounts payable and other operating liabilities ...... 677.0 847.3
Other operating assets................................. (66.7) (78.5)
Net cash used in operating activities ................... (803.3) (609.7)
Cash flows used in investing activities:
Capital expenditures, net .................................. (387.5) (315.4)
Cash flow from financing activities:
Short-term borrowing, net .................................. 957.4 1,047.6
Long-term borrowings ....................................... 9.9 325.4
Exercise of stock options .................................. 58.0 24.8
Long-term debt repayment ................................... (135.6) (27.2)
Share repurchase program ................................... (212.1) --
Net cash provided by financing activities ................ 677.6 1,370.6
Effect of exchange rate changes on cash and cash equivalents 34.9 3.5
Cash and cash equivalents:
(Decrease)/increase during period .......................... (478.3) 449.0
Beginning of period ........................................ 760.9 202.7
End of period .............................................. $ 282.6 $ 651.7
Supplemental disclosures of cash flow information:
Income taxes paid .......................................... $ 154.4 $ 170.6
Interest paid .............................................. $ 79.0 $ 79.5
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
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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. Results for interim periods are not indicative of
results to be expected for the fiscal year due to the seasonal nature
of the Company's business.
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. The impact of
adopting the new standard will not result in a change to earnings per
share for the third quarter or nine month periods ended November 1,
1997 and November 2, 1996, as presented.
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. The
Company is planning to seek review in the Supreme Court of the United
States, and has obtained a stay of judgment pending that application.
4. Other Matters
See Part II - Item 1. - Legal Proceedings
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Total sales increased 14 percent to $2.1 billion for the third quarter ended
November 1, 1997 as compared with $1.9 billion for the third quarter ended
November 2, 1996. For the first nine months of 1997, total sales increased 15
percent to $6.1 billion as compared with $5.3 billion for the first nine months
of 1996. Excluding the impact of foreign currency, total sales increased 16
percent in the third quarter and 17 percent for the first nine 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 6 percent for both the third quarter
and first nine months of 1997, 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, diecast cars, juvenile merchandise and virtual pets.
Internationally, the Company experienced a comparable toy store sales increase
in local currency for the third quarter and first nine months of 1997 as
compared with the same periods in 1996, including double digit comparable store
sales increases in both Canada and Australia. The sales increases
internationally were primarily driven by the continued strength of the video
game business and virtual pets, as well as innovative marketing and advertising
programs. The Company's Kids "R" Us division experienced a comparable store
sales increase in the third quarter, while comparable store sales decreased for
the first nine months of 1997. The Babies "R" Us division experienced comparable
store sales decreases for the third quarter and the first nine months of 1997,
primarily due to the expected impact during the transition of the Baby
Superstore locations to Babies "R" Us, which is now complete.
Cost of sales, as a percentage of sales, remained constant for the third quarter
and increased by 0.3 percent for the first nine months of 1997, as compared with
the same periods in 1996. The increase for the first nine months was due
primarily to the negative impact on the sales mix caused by increased sales of
low margin video hardware merchandise, somewhat offset by lower sales of low
margin consumables.
Selling, advertising, general and administrative expenses as a percentage of
sales decreased by 0.3 percent and 0.5 percent for the third quarter and first
nine 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 $8 million and $21.8 million for the
third quarter and first nine 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
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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) reduced earnings per share by $.13 for the nine months ended
November 2, 1996. Excluding the impact of the award, net earnings for the nine
months ended November 2, 1996 would have been $79.1 million or $.29 per share.
Net interest expense decreased by $1.9 million and $8.6 million for the third
quarter and first nine 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.
Foreign currency exchange did not have a material effect on net earnings for the
third quarter or the first nine months of 1997.
Financial Condition
The Company opened 19 new toy stores in the United States this year utilizing
the "Concept 2000" store design. The Company also opened 3 new Kids "R" Us
stores and 12 new Babies "R" Us stores in the United States this year. The
Company plans to open an additional 8 new Babies "R" Us stores by the end of
1997. Internationally, the Company added 37 new toy stores this year and plans
to add an additional 8 new international toy stores by the end of fiscal 1997.
16 of the new international toy stores added this year will be either franchise
or joint venture stores. In addition, the Company completed the remodeling of 56
toy stores in the United States into the "Concept 2000" format. Store remodeling
plans for 1998 are currently being developed but have not yet been finalized.
Short-term borrowings, net of investments increased by $252.9 million at
November 1, 1997 as compared with the November 2, 1996 due primarily to higher
inventory levels, increased capital expenditures and cash used for the Company's
share repurchase program.
Long-term debt repayments of $135.6 million this year were primarily
attributable to the retirement of convertible debt assumed with the acquisition
of Baby Superstore.
The Company repurchased 6.7 million shares of its common stock through its share
repurchase program for $212.1 million during the first nine months of 1997, of
which $124 million was spent in the third quarter of 1997. The Company
repurchased 28 million shares of its common stock for $906 million since the $1
billion share repurchase program was announced in January 1994.
7
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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 $575 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
the 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 European Economic Union.
Weighted average common equivalent shares increased to 288.7 million for the
nine month period ended November 1, 1997 compared with 277.0 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. On September 30, 1997,
the administrative law judge filed an Initial Decision
upholding the FTC's complaint against the Company.
After the filing of the FTC complaint, several class
action suits were filed against the Company in State courts in
Alabama and California, alleging that the Company has violated
certain state competition laws as a consequence of the
behavior alleged in the FTC complaint. After the Initial
Decision was handed down, more than twenty class actions were
filed in federal and state courts in various jurisdictions
alleging that the Company has violated the federal antitrust
laws as a consequence of the behavior alleged in the FTC
complaint. In addition, the attorneys general of thirty-eight
states, the District of Columbia and Puerto Rico have filed a
suit against the Company in their capacity as representatives
of the consumers of their states, alleging that the Company
has violated federal and state antitrust laws as a consequence
of the behavior alleged in the FTC complaint. These suits seek
damages in unspecified amounts and other relief under state
and/or federal law.
The next stage in the FTC matter is an appeal to the
Commissioners of the FTC. The Company will be entitled to have
the United States Circuit Court of Appeals review any adverse
decision by the FTC.
The Company believes that both its policy and its conduct in
connection with the foregoing are within the law. The Company
also believes that these actions will not have a material
adverse effect on its financial condition, results of
operations or cash flow.
9
<PAGE>
PART II - OTHER INFORMATION
(Continued)
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. The Company is planning to seek review in the
Supreme Court of the United States, and has obtained a stay of
the judgment pending that application.
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: December 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
Condensed Consolidated Balance Sheet and Condensed Consolidated Statement
of Earnings as reported on third quarter Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-2-1997
<PERIOD-END> Nov-1-1997
<CASH> 282,600
<SECURITIES> 0
<RECEIVABLES> 173,600
<ALLOWANCES> 0
<INVENTORY> 3,923,500
<CURRENT-ASSETS> 4,453,800
<PP&E> 5,627,500
<DEPRECIATION> 1,422,000
<TOTAL-ASSETS> 9,488,900
<CURRENT-LIABILITIES> 4,092,800
<BONDS> 901,200
0
0
<COMMON> 30,000
<OTHER-SE> 4,100,600
<TOTAL-LIABILITY-AND-EQUITY> 9,488,900
<SALES> 6,055,000
<TOTAL-REVENUES> 6,055,000
<CGS> 4,136,500
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 171,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,800
<INCOME-PRETAX> 176,000
<INCOME-TAX> 64,200
<INCOME-CONTINUING> 111,800
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 111,800
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
