SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
Indicate by check mark whether 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.
Yes [X] No [ ]
261,322,061 shares of the registrant's Common Stock were outstanding on
August 25, 1998.
<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....................................................8
SIGNATURES....................................................................10
1
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<TABLE>
TOYS "R" US, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
<CAPTION>
August 1, August 2, January 31,
1998 1997 1998
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 273 $ 227 $ 214
Accounts and other receivables 157 158 175
Merchandise inventories 2,745 2,972 2,464
Prepaid expenses and other current assets 76 72 51
Total current assets 3,251 3,429 2,904
Property and equipment, net and other assets 4,765 4,563 4,703
Goodwill, net 351 361 356
$ 8,367 $ 8,353 $ 7,963
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,255 $ 857 $ 134
Accounts payable 1,312 1,676 1,280
Accrued expenses and other current liabilities 404 382 680
Income taxes payable 145 66 231
Total current liabilities 3,116 2,981 2,325
Long-term debt 787 905 851
Deferred income taxes 227 231 219
Other liabilities 161 116 140
Stockholders' equity 4,076 4,120 4,428
$ 8,367 $ 8,353 $ 7,963
<FN>
See 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)
13 Weeks Ended 26 Weeks Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $ 2,020 $ 1,989 $ 4,063 $ 3,913
Costs and expenses:
Cost of sales 1,390 1,355 2,807 2,681
Selling, advertising, general &
administrative 520 502 1,038 981
Depreciation and amortization 61 55 122 112
Interest expense - net 27 19 44 35
1,998 1,931 4,011 3,809
Earnings before income taxes 22 58 52 104
Income taxes 8 21 19 38
Net earnings $ 14 $ 37 $ 33 $ 66
Basic earnings per share $ .05 $ .13 $ .12 $ .23
Weighted average basic shares outstanding 273.0 285.7 276.6 286.3
Diluted earnings per share $ .05 $ .13 $ .12 $ .23
Weighted average diluted shares outstanding 273.6 289.4 278.0 288.9
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In millions)
<CAPTION>
26 Weeks Ended
August 1, August 2,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net Earnings $ 33 $ 66
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 122 112
Deferred income taxes 8 9
Changes in operating assets and liabilities:
Merchandise inventories (281) (758)
Accounts payable and other operating liabilities (310) (44)
Other operating assets (6) (64)
Net cash used in operating activities (434) (679)
Cash flows used in investing activities:
Capital expenditures, net (180) (251)
Cash flow from financing activities:
Short-term borrowings, net 1,121 553
Long-term borrowings 31 9
Long-term debt repayments (79) (131)
Exercise of stock options 15 39
Share repurchase program (420) (88)
Net cash provided by financing activities 668 382
Effect of exchange rate changes on cash and
cash equivalents 5 14
Cash and cash equivalents:
Increase/(decrease) during period 59 (534)
Beginning of period 214 761
End of period $ 273 $ 227
Supplemental disclosures of cash flow information:
Income tax payments $ 95 $ 122
Interest payments $ 49 $ 57
<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)
(In millions)
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. Comprehensive Income
As of February 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's
net income or stockholders' equity. SFAS No. 130 requires changes in
the Company's foreign currency translation adjustments, which prior
to adoption were only reported as a separate component of
stockholders' equity, to also be included in other comprehensive
income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
Comprehensive income (loss) amounted to ($2) million and ($6) million
for the second quarter ended August 1, 1998 and August 2, 1997,
respectively. For the 26 weeks ended August 1, 1998 and August 2, 1997
comprehensive income (loss) amounted to $46 million and $(22) million,
respectively, as a result of the change in foreign currency translation
adjustments.
3. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999.
Management does not anticipate that the adoption of the new Statement
will have a significant effect on earnings or the financial position of
the Company.
4. Other Matters
See Part II - Item I - Legal Proceedings.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Total sales were $2 billion for the second quarter ended August 1, 1998 and
August 2, 1997. For the first six months of 1998, sales increased 5% to $4.1
billion as compared with $3.9 billion for the first six months of 1997.
Excluding the impact of foreign currency, total sales increased 4% in the second
quarter and 5% for the first six months of 1998, as compared with the same
periods in the prior year. The increase in total sales is attributable to the
Company's continued store expansion.
Comparable USA toy store sales decreased by 2% for the second quarter of 1998,
and were flat for the first six months as compared with the same periods in
1997. The decrease was primarily due to lower sales of video hardware,
including the impact of price deflation, as well as lower sales of virtual
pets, plush and action figures, all of which had very strong sales
the prior year. Internationally, the Company experienced a same store sales
decrease due to last year's strong sales in video hardware sold at much higher
price points, lower sales of virtual pets, as well as the downturn in the
Japanese economy.
Cost of sales, as a percentage of sales, increased by approximately .8% and .6%
for the second quarter and the first six months of 1998, respectively, as
compared with the same periods in 1997. This was due in part to higher sales of
lower margin video software merchandise throughout the world as well as a
decrease in the sales of higher margin action figures.
Selling, advertising, general and administrative expenses as a percentage of
sales increased by .6% and .4 % for the second quarter and the first six months
of 1998, respectively, as compared with the same periods in 1997. This was due
to strategic investments for the future, which were not leveraged by a
significant increase in sales.
Depreciation and amortization increased by $6 million and $10 million for the
second quarter and the first six months of 1998, respectively, as compared with
the same periods in 1997 as a result of the Company's continued store expansion
and growth.
Net interest expense increased by approximately $8 million and $9 million for
the second quarter and the first six months of 1998, respectively, as compared
with the same periods in 1997 due to the increase in short-term borrowings
discussed below and the inclusion of a $4 million charge in 1998 relating to the
early extinguishment of debt.
Foreign currency exchange did not have a material effect on net earnings for the
second quarter or the first six months of 1998.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(continued)
Financial Condition
In 1998, the Company plans to open approximately 5 toy stores in the United
States. In addition, the Company's expansion plans include opening approximately
15 to 20 new Babies "R" Us stores in the United States, and approximately 35 new
toy stores internationally, including 15 franchise stores.
Short-term borrowings, net of investments increased by approximately $352
million at August 1, 1998 as compared with August 2, 1997 due primarily to cash
used for the Company's share repurchase program and the early extinguishment of
$67 million of 8 1/4% debentures. Accordingly, the current ratio has declined to
1.04 to 1 at August 1, 1998, as compared with 1.15 to 1 at August 2, 1997. As of
August 1, 1998, the Company has reduced consolidated inventory levels by $227
million from the prior year. Extensive reviews of all inventory categories and
the entire supply chain management process continues as the Company seeks to
determine the optimum inventory category levels.
The Company repurchased nearly 16 million shares of its common stock through its
share repurchase programs for $420 million during the first six months of 1998.
The Company completed its $1 billion share repurchase program, announced in
January 1994, and has $633 million remaining in its new $1 billion share
repurchase program announced in January 1998. As discussed in the Company's
January 31, 1998 Annual Report on Form 10K, the Company is in the process of
analyzing all aspects of its business to identify actions that could enhance
shareholder returns.
Annual capital expenditures for new and existing facilities are estimated to be
approximately $450 million. 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.
Weighted average diluted common equivalent shares decreased to 273.6 million for
the quarter ended August 1, 1998, compared with 289.4 million for the same
period in 1997. For the six month period ended August 1, 1998, weighted average
diluted common equivalent shares decreased to 278.0 million compared with 288.9
million for the same period in 1997. The decrease was due primarily to the
Company repurchasing shares under the share repurchase programs.
Year 2000
The Company is modifying significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. In addition, the Company has initiated formal communications
with all of its significant suppliers and expects all modifications and
conversions to be completed on a timely basis. The total cost for the Year 2000
project is not material to any one year and is being expensed as incurred.
7
<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.
The Company has appealed the Initial Decision to the
Commissioners of the FTC. That appeal was argued on February
19, 1998. The Company will be entitled to have the United
States Court of Appeals review any adverse decision by the
FTC.
Since the commencement of the FTC proceeding, several class
action suits have been filed against the Company in various
federal courts and in State courts in Alabama, California and
New Jersey alleging that the Company has violated certain
federal and state competition laws as a consequence of the
behavior alleged in the FTC complaint. In addition, the
attorneys general of forty-four 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
federal class action and attorneys general suits have been
consolidated for pre-trial purposes in the United States
District Court for the Eastern District of New York.
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, results of operations or cash flows.
8
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<TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company's stockholders
on June 3, 1998 all of management's nominees for
director were elected.
Management's nominees for director received the
following votes:
<CAPTION>
Number of Shares Withheld Votes
<S> <C> <C>
Robert A. Bernhard 232,566,156 6,134,201
RoAnn Costin 232,582,605 6,117,752
Michael Goldstein 232,582,855 6,117,502
Calvin Hill 232,580,282 6,120,075
Shirley Strum Kenny 232,582,590 6,117,767
Bruce W. Krysiak 232,577,647 6,122,710
Charles Lazarus 232,579,800 6,120,557
Norman S. Matthews 232,582,912 6,117,445
Howard W. Moore 232,584,043 6,116,314
Robert C. Nakasone 232,544,119 6,156,238
Arthur B. Newman 232,584,512 6,115,845
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule for the quarter
ended August 1, 1998.
(b) Exhibit 27.2 - Financial Data Schedule for the quarter
ended August 2, 1997 Restated.
</TABLE>
9
<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 4, 1998 Toys "R" Us, Inc.
-----------------
(Registrant)
s/ Louis Lipschitz
(Signature)
Louis Lipschitz
Executive Vice President and
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of
Earnings as reported on second quarter Form 10Q and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jan-30-1999
<PERIOD-START> May-03-1998
<PERIOD-END> Aug-01-1998
<CASH> 273,000
<SECURITIES> 0
<RECEIVABLES> 157,000
<ALLOWANCES> 0
<INVENTORY> 2,745,000
<CURRENT-ASSETS> 3,251,000
<PP&E> 5,767,000
<DEPRECIATION> 1,519,000
<TOTAL-ASSETS> 8,367,000
<CURRENT-LIABILITIES> 3,116,000
<BONDS> 787,000
0
0
<COMMON> 30,000
<OTHER-SE> 4,046,000
<TOTAL-LIABILITY-AND-EQUITY> 8,367,000
<SALES> 4,063,000
<TOTAL-REVENUES> 4,063,000
<CGS> 2,807,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 122,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,000
<INCOME-PRETAX> 52,000
<INCOME-TAX> 19,000
<INCOME-CONTINUING> 33,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of
Earnings as reported on the second quarter Form 10Q and is qualified in its
entirety by reference to such financial statements.
RESTATED
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> May-04-1997
<PERIOD-END> Aug-02-1997
<CASH> 227,000
<SECURITIES> 0
<RECEIVABLES> 158,000
<ALLOWANCES> 0
<INVENTORY> 2,972,000
<CURRENT-ASSETS> 3,429,000
<PP&E> 5,450,000
<DEPRECIATION> 1,365,000
<TOTAL-ASSETS> 8,353,000
<CURRENT-LIABILITIES> 2,981,000
<BONDS> 905,000
0
0
<COMMON> 30,000
<OTHER-SE> 4,090,000
<TOTAL-LIABILITY-AND-EQUITY> 8,353,000
<SALES> 3,913,000
<TOTAL-REVENUES> 3,913,000
<CGS> 2,681,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 112,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> 104,000
<INCOME-TAX> 38,000
<INCOME-CONTINUING> 66,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,000
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
