===================================================================
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 May 1, 1999
============
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 required 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 [ ]
247,589,089 shares of the registrant's Common Stock were outstanding on May 17,
1999.
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<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...................................................11
SIGNATURES....................................................................13
1
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
==========================================
(In millions)
<CAPTION>
May 1, May 2, January 30,
1999 1998 1999
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 289 $ 438 $ 410
Accounts and other receivables 204 178 204
Merchandise inventories 2,209 2,656 1,902
Prepaid expenses and other current assets 86 66 81
Total current assets 2,788 3,338 2,597
Property and equipment, net and other assets 4,935 4,741 4,955
Goodwill, net 344 354 347
$8,067 $8,433 $7,899
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 591 $ 824 $ 156
Accounts payable 1,411 1,446 1,415
Accrued expenses
and other current liabilities 505 443 696
Income taxes payable 176 161 224
Total current liabilities 2,683 2,874 2,491
Long-term debt 1,229 867 1,222
Deferred income taxes 333 223 333
Other liabilities 227 122 229
Stockholders' equity 3,595 4,347 3,624
$8,067 $ 8,433 $ 7,899
<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
May 1, May 2,
1999 1998
<S> <C> <C>
Net sales $ 2,166 $ 2,043
Costs and expenses:
Cost of sales 1,505 1,417
Selling, advertising, general & administrative 552 518
Depreciation and amortization 66 61
Interest expense- net 16 17
2,139 2,013
Earnings before taxes on income 27 30
Taxes on income 10 11
Net earnings $ 17 $ 19
Basic earnings per share $ .07 $ .07
Weighted average basic shares outstanding 249.2 280.2
Diluted earnings per share $ .07 $ .07
Weighted average diluted shares outstanding 249.3 282.3
<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>
13 Weeks Ended
May 1, May 2,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 17 $ 19
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 66 61
Deferred income taxes - 5
Changes in operating assets and liabilities:
Merchandise inventories (307) (192)
Accounts payable and other operating liabilities (242) (161)
Other operating assets (7) (11)
Net cash used in operating activities (473) (279)
Cash flows used in investing activities:
Capital expenditures, net (78) (80)
Cash flows from financing activities:
Short-term borrowings, net 450 691
Long-term borrowings 10 31
Long-term debt repayment (15) (10)
Exercise of stock options 6 14
Share repurchase program (53) (150)
Net cash provided by financing activities 398 576
Effect of exchange rate changes
on cash and cash equivalents 32 7
Cash and cash equivalents:
(Decrease)/increase during period (121) 224
Beginning of period 410 214
End of period $289 $438
Supplemental disclosures of cash flow information:
Income tax payments $ 56 $ 73
Interest paid $ 21 $ 23
<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. Commercial paper
Commercial paper of $368 million is classified as long-term debt at May
1, 1999 and January 30, 1999 as the Company maintains long-term
committed credit agreements to support these borrowings and intends
to refinance them on a long-term basis through commercial paper
borrowings. Additionally, commercial paper of $274 million and $328
million are included in short-term borrowings at May 1, 1999 and May
2, 1998, respectively.
3. Comprehensive income
Comprehensive income amounted to $17 million and $48 million for
the first quarter ended May 1, 1999 and May 2, 1998, respectively,
as a result of the change in foreign currency translation.
4. Segments
The Company's reportable segments are Toys R Us - United States and Toys
R Us - International. Divisions that do not meet quantitative
reportable thresholds are included in the category classified as Other,
which is comprised of the Kids R Us, Babies R Us and Toys R Us Direct
divisions. Information related to segments is as follows:
<TABLE>
<CAPTION>
May 1, May 2,
1999 1998
<S> <C> <C>
Net sales
Toys R Us USA $ 1,184 $ 1,165
Toys R Us International 523 482
Other 459 396
Total $ 2,166 $ 2,043
Operating earnings/(loss)
Toys R Us USA $ 41 $ 48
Toys R Us International (20) (19)
Other 27 20
General corporate expenses (5) (2)
Interest expense, net (16) (17)
Earnings before taxes on income $ 27 $ 30
<FN>
5. Other Matters See Part II - Item I - Legal Proceedings.
</FN>
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
Results of Operations
Total consolidated sales increased 6% to $2.2 billion for the first quarter
ended May 1, 1999, as compared with $2 billion for the first quarter ended May
2, 1998. On a consolidated basis, comparable store sales, in local currencies,
increased by 2% for the first quarter of 1999, as compared with the first
quarter of 1998. The sales increases were primarily driven by the Companys store
expansion and the growth in the Companys Babies R Us division.
Comparable store sales for the Toys R Us USA division increased by 1% for the
first quarter of 1999, as compared with the first quarter of 1998. The increase
was primarily driven by the growing strength of the toy industry and
improvements being made in the Company's base business. Internationally, the
Company's overall comparable toy store sales were flat, on a local currency
basis, for the first quarter of 1999, as compared with the first quarter of
1998. The Company's Babies R Us division had a comparable store sales increase
in the mid-teens for the quarter, driven by an increase in customer counts as
well as an increase in our average sale per customer. The Company's Kids R Us
division experienced a decrease in comparable store sales in the low single
digits for the first quarter of 1999, as compared with the first quarter of
1998.
On a consolidated basis, cost of sales, as a percentage of sales, increased by
approximately 0.1% for the first quarter of 1999, as compared with the first
quarter of 1998. Cost of sales for both the Toys R Us USA and International
divisions each increased by 0.4% for the first quarter of 1999, as compared with
the first quarter of 1998. These increases were due in part to a change in the
sales mix. The Companys other divisions experienced a combined decrease in cost
of sales, as a percentage of sales, for the first quarter of 1999 as compared
with the first quarter of 1998, primarily due to a shift in the sales mix.
Consolidated selling, advertising, general and administrative expenses (SG&A) as
a percentage of sales increased by 0.1% for the first quarter of 1999, as
compared with the first quarter of 1998. SG&A, as a percentage of sales,
remained flat in both the Company's Toys R Us USA and International divisions
for the first quarter of 1999, as compared with the first quarter of 1998.
During the same period, the Company's other divisions reported a combined 0.1%
increase in SG&A, as a percentage of sales.
Depreciation and amortization increased by $5 million for the first quarter of
1999, as compared with the first quarter of 1998 as a result of the Company's
continued store expansion and growth.
Foreign currency exchange did not have a material effect on sales or net
earnings for the first quarter ended May 1, 1999.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Restructuring and Other Charges
During 1998 the Company announced strategic initiatives to reposition its
worldwide business and other charges including the customer-focused reformatting
of its toy stores into the new C-3 format, as well as the restructuring of its
International operations which resulted in a charge of $353 million ($279
million net of tax benefits, or $1.05 per share). Details on the components of
the Company's strategic initiatives and other charges are described in the
Company's Annual Report for the year ended January 30, 1999; the reserve
balances as at that date and subsequent utilization are as follows:
<TABLE>
<CAPTION>
Description Reserve Balance Reserve Balance
@ 1/30/99 Utilized @ 5/1/99
<S> <C> <C> <C>
Closings/Downsizings:
Lease commitments $ 81 $ - $ 81
Severance and other closing costs 25 1 24
Other 24 - 24
Total Restructuring $ 130 $ 1 $ 129
Changes in accounting estimates and
provisions for legal settlements $ 39 - $ 39
<FN>
The Company has closed two Toys R Us toy stores and three Kids R Us stores in
the United States, as well as seven Toys R Us toy stores internationally since
the recording of the charges. In addition, the Company has closed two
distribution centers and seven area offices in the United States. Unused
reserves should be utilized in 1999, with the exception of those related to long
- -term lease commitments.
In 1998 the Company also announced markdowns and other charges of $345 million
($229 million net of tax benefits, or $.86 per share). Details on the
components of these charges are described in the Company's Annual Report for the
year ended January 30, 1999; the reserve balances as at that date and subsequent
utilization are as follows:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Description Reserve Balance Reserve Balance
@ 1/30/99 Utilized @ 5/1/99
<S> <C> <C> <C>
Markdowns:
Clear excess inventory $ 74 $ 5 $ 69
Store closings 27 - 27
Change in accounting estimates
and other 6 - 6
Total Cost of Sales $ 107 $ 5 $ 102
<FN>
Unused reserves are expected to be utilized in 1999.
</FN>
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Impact of Year 2000
Year 2000 issues are those related to the inability of certain computer systems
to properly recognize and process date-sensitive information relative to the
year 2000 and beyond. The Company's Year 2000 project which began in 1997,
includes four major elements which are outlined in the Company's Annual Report
for the year ended January 30, 1999.
The total estimated cost to achieve year 2000 compliance is approximately $25
million, which is being expensed as incurred. These estimates exclude internal
labor and related costs. Approximately $20 million of these costs have been
incurred as of May 1, 1999 and all costs are being funded through cash flows
from operations. The Company has begun to develop, but not yet finalized, a
contingency plan for possible year 2000 issues. Contingency plans are expected
to be in place by the end of the second quarter of 1999.
The total cost of the Year 2000 project is not expected to have a material
effect on the Companys financial position or results of operations. The costs
of conversion and the completion dates for the project are management's best
estimates.
Financial Condition
In 1999, the Company plans to open approximately 10 new toy stores in the United
States and is currently in the process of remodeling 180 to 200 existing toy
stores in the United States to the new C-3 format. The Company is also planning
to add approximately 25 new international toy stores, including 10 franchise
stores, and approximately 20 new Babies R Us stores in the United States in
1999.
The Company plans to continue implementing its C-3 Total Solutions Strategy
aimed at developing greater everyday customer value in terms of price, service
and the total shopping experience. As part of this plan, the Company expects to
convert approximately 180 to 200 existing Toys R Us toy stores in the United
States to its new C-3 format in 1999 and an additional 325 in 2000. The C-3
store format, which stands for Customer friendly, Cost-effective and Concept for
the future, includes wider aisles, more feature opportunities and end-caps,
shops and logical category adjacencies all designed to improve customer shopping
patterns and experience. The sales floor has been expanded by 20% with a
one-third reduction in the size of the back room. The Company also plans to
implement some of the high potential elements of the C-3 format in about 175
additional stores in 1999. Finally, the 10 new toy stores slated to open in the
United States in 1999, as well as all new USA toy stores going forward, will be
in the C-3 format.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
On April 27, 1999, the Company announced several major strategic initiatives
regarding online retailing, as part of the Company's strategy to be the clear
leader in the online retail market for toys and children's products by the
fourth quarter of 1999. The three key initiatives that were announced
include: the establishment of toysrus.com as a separate subsidiary
headquartered in Northern California; a strategic partnership with Benchmark
Capital, a Silicon Valley venture capital firm; and the acquisition of
a 500,000 square foot, state-of-the-art, fully-automated distribution
center strategically located in Memphis, Tennessee. On May 12, 1999, the
Company announced the appointment of Bob Moog as Chief Executive Officer of its
toysrus.com subsidiary.
For 1999, capital requirements for the Company's expansion plans mentioned
above, as well as capital requirements for its recently announced
toysrus.com subsidiary, are estimated to be approximately $550 million.
Total borrowings, net of cash and cash equivalents increased by approximately
$276 million at May 1, 1999, as compared with May 2, 1998 due primarily to cash
used for the Company's share repurchase program and increased capital
expenditures, partially offset by the reduction in merchandise inventories. The
Company repurchased approximately 3 million shares of its common stock through
its share repurchase program for approximately $53 million during the first
quarter of 1999.
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
commercial paper and bank borrowings by foreign subsidiaries.
Weighted average diluted common equivalent shares decreased to 249.3 million
during the first quarter ended at May 1, 1999 from 282.3 million during the
first quarter ended May 2, 1998, due primarily to the shares repurchased by the
Company under its share repurchase program.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. The Company may also make forward-looking statements
in other documents filed with the Securities and Exchange Commission, its annual
report to shareholders, its proxy statement and in press releases. All
statements that are not historical facts, including statements about the
Company's beliefs or expectations, are forward-looking statements. Such
statements involve risks and uncertainties that exist in the company's
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
operations and business environment that could render actual outcomes and
results materially different than predicted. The Company's forward-looking
statements are based on assumptions about many factors, including, but not
limited to, ongoing competitive pressures in the retail industry, changes in
consumer spending, general economic conditions in the United States and other
jurisdictions in which the Company conducts business (such as interest rates and
consumer confidence) and normal business uncertainty. While the Company believes
that its assumptions are reasonable at the time forward-looking statements were
made, it cautions that it is impossible to predict the actual outcome of
numerous factors and, therefore, readers should not place undue reliance on such
statements. Forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update such statements in light of
new information or future events.
10
<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.
On October 13, 1998, the FTC issued a final order and opinion
upholding the FTC's complaint against the Company.
The Company has appealed the FTC's decision to the United States
Court of Appeals for the Seventh Circuit. The appeal was argued on
May 18, 1999.
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 thirty purported 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 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 Company believes that it has always acted fairly and in the best
interests of its customers and that both its policy and its conduct
in connection with the foregoing have been and are within the law.
However, to avoid the cost and uncertainty of protracted litigation
the Company has reached an agreement to settle, subject to court
approval, all of the class action and attorney general lawsuits in a
manner which will not have a material adverse effect on its financial
condition, results of operations or cash flow. The Company accrued
all anticipated costs relating to this matter as of January 30, 1999.
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule for the quarter
ended May 1, 1999.
(b) On April 16, 1999, the Company filed a Form 8-K in
connection with the approval by the Company's Board
of Directors of an amendment to the Rights Agreement
dated as of January 7, 1998.
12
<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: June 14, 1999 Toys "R" Us, Inc.
-----------------
(Registrant)
s/ Louis Lipschitz
(Signature)
Louis Lipschitz
Executive Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Condensed
Consolidated Balance Sheets and Condensed Consolidated Statements of Earnings as
reported on the first quarter for 10-Q and is qualified in its entirety by
reference to such finanicial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 289,000
<SECURITIES> 0
<RECEIVABLES> 204,000
<ALLOWANCES> 0
<INVENTORY> 2,209,000
<CURRENT-ASSETS> 2,788,000
<PP&E> 5,821,000
<DEPRECIATION> 1,626,000
<TOTAL-ASSETS> 8,067,000
<CURRENT-LIABILITIES> 2,683,000
<BONDS> 1,229,000
0
0
<COMMON> 30,000
<OTHER-SE> 3,565,000
<TOTAL-LIABILITY-AND-EQUITY> 8,067,000
<SALES> 2,166,000
<TOTAL-REVENUES> 2,166,000
<CGS> 1,505,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 66,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> 27,000
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 17,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,000
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
