===================================================================
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 April 29, 2000
============
Commission file number 1-11609
TOYS "R" US, INC.
Incorporated pursuant to the Laws of Delaware
============
Internal Revenue Service Employer Identification No. 22-3260693
225 Summit Avenue, Montvale, New Jersey 07645
(201) 802-5000
461 From Road, Paramus, New Jersey 07652
(201) 262-7800
(Former Reporting Address and Telephone Number)
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 [ ]
216,231,370 shares of the registrant's Common Stock were outstanding on
June 5, 2000.
===================================================================
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.................................8
PART II - OTHER INFORMATION..................................................13
SIGNATURES...................................................................15
1
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
==========================================
(In millions)
<CAPTION>
<S>
ASSETS April 29, May 1, January 29,
2000 1999 2000
---------- --------- ---------
<C> <C> <C>
Current Assets:
Cash and cash equivalents $ 439 $ 289 $ 584
Accounts and other receivables 135 204 182
Merchandise inventories 2,145 2,209 2,027
Prepaid expenses and other current assets 67 86 80
---------- ----------- ---------
Total current assets 2,786 2,788 2,873
Property and equipment, net and other assets 4,483 4,935 5,106
Investment in Toys "R" Us - Japan 91 - -
Goodwill, net 371 344 374
------------ ------------- -----------
$ 7,731 $ 8,067 $ 8,353
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 529 $ 591 $ 278
Accounts payable 1,226 1,411 1,617
Accrued expenses and other current liabilities 483 505 836
Income taxes payable 207 176 107
------------ ------------- -----------
Total current liabilities 2,445 2,683 2,838
Long-term debt 991 1,229 1,230
Deferred income taxes 352 333 362
Other liabilities 240 227 243
Minority interest in Toysrus.com 57 - -
Stockholders' equity 3,646 3,595 3,680
------------ ------------- -----------
$ 7,731 $ 8,067 $ 8,353
============ ============= ===========
<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
-----------------------------------------------
April 29, May 1,
2000 1999
--------------- ---------------
<S> <C> <C>
Net sales $ 2,319 $ 2,166
Cost of sales 1,601 1,505
------------- -----------
Gross profit 718 661
Selling, general and administrative expenses 599 552
Depreciation and amortization expenses 72 66
-------------- ------------
Operating earnings 47 43
Other income (expense):
Gain from initial public offering
of Toys"R"Us - Japan 315 -
Interest expense - net (23) (16)
-------------- ------------
Earnings before taxes on income 339 27
Taxes on income 124 10
-------------- ------------
Net earnings $ 215 $ 17
============== ============
Basic earnings per share $ 0.93 $ 0.07
============== ============
Weighted average basic shares outstanding 229.9 249.2
============== ============
Diluted earnings per share $ 0.93 $ 0.07
============== ============
Weighted average diluted shares outstanding 231.4 249.3
============== ============
<FN>
</FN>
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
====================================================
(In millions)
<CAPTION>
13 Weeks Ended
-------------------------
April 29, May 1,
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 215 $ 17
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 72 66
Deferred income taxes 33 -
Minority interest in Toysrus.com (3) -
Gain from initial public offering of Toys "R" Us - Japan (315) -
Changes in operating assets and liabilities:
Merchandise inventories (311) (307)
Accounts payable and
other operating liabilities (238) (242)
Other operating assets 3 (7)
--------- --------
Net cash used in operating activities (544) (473)
--------- --------
Cash flows from investing activities:
Capital expenditures, net (50) (78)
Net proceeds from sale of stock of Toys "R" Us - Japan 267 -
Reduction in cash due to
deconsolidation of Toys "R" Us - Japan (15) -
--------- --------
Net cash provided by (used in) investing activities 202 (78)
--------- --------
Cash flows from financing activities:
Short-term borrowings, net 361 450
Long-term borrowings - 10
Long-term debt repayment (11) (15)
Proceeds received from investors in Toysrus.com 60 -
Issuance of stock warrants 10 -
Exercise of stock options (1) 6
Share repurchase program (227) (53)
---------- --------
Net cash provided by financing activities 192 398
Effect of exchange rate changes on cash and cash equivalents 5 32
Cash and cash equivalents:
Decrease during period (145) (121)
Beginning of period 584 410
---------- ---------
End of period $ 439 $ 289
========== =========
Supplemental disclosures of cash flow information:
Income tax (refunds) payments, net $ (9) $ 56
========== =========
Interest paid $ 32 $ 21
========== =========
<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 condensed consolidated 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.
The financial statements and notes are presented in accordance with the
rules and regulations of the Securities and Exchange Commission and do not
contain certain information included in the company's annual report.
Therefore, the interim statements should be read in conjunction with the
company's annual report for the fiscal year ended January 29, 2000.
2. Commercial paper
Commercial paper of $368 million is classified as long-term debt. 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 $494 million
and $274 million are included in short-term borrowings at April 29, 2000
and May 1, 1999, respectively.
3. Comprehensive income
Comprehensive income amounted to $160 million and $17 million for the first
quarter ended April 29, 2000 and May 1, 1999, respectively, as a result of
the change in foreign currency translation.
4. Gain from initial public offering of Toys "R" Us - Japan
The company recorded a non-operating gain of $315 million ($200 million net
of taxes) resulting from the initial public offering of shares of Toys -
Japan, which was completed on April 24, 2000. Of this gain, $91 million
resulted from an adjustment to the basis of the company's investment in
Toys - Japan and $224 million related to the sale of a portion of Toys -
Japan's common stock owned by the company. In connection with this
transaction the company also received net cash proceeds of $267 million and
recorded a provision for current income taxes of $82 million and a deferred
income tax liability of $33 million. Accordingly, the company's ownership
percentage in Toys - Japan was reduced from 80% to 48% and Toys - Japan
will now operate as a licensee of the company.
5
<PAGE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
==========================================================
(In millions)
The company has not included the balance sheet of Toys - Japan in its
consolidated balance sheet as of April 29, 2000. Accordingly, the cash
flows resulting from the change in the assets and liabilities of Toys -
Japan have been excluded from the company's condensed consolidated
statement of cash flows for the 13 weeks ended April 29, 2000. In addition,
beginning with the second quarter of 2000, the company will no longer
consolidate the operating results of Toys - Japan and will use the equity
method to account for this investment.
5. Minority interest in Toysrus.com
On February 24, 2000, the company entered into a partnership agreement with
SOFTBANK Venture Capital and affiliates which included an investment by
SOFTBANK and affiliates of $60 million in Toysrus.com for a 20% ownership
interest. The company has included a $3 million credit related to the
minority interest in the net loss of Toysrus.com in selling, general and
administrative expenses for the first quarter ended April 29, 2000.
In connection with the partnership with SOFTBANK Venture Capital and
affiliates, the company issued 1.2 million stock purchase warrants
("warrants") for $8.33 per warrant. Each warrant gives the holder thereof
the right to purchase one share of the company's common stock at an
exercise price of $13, until the expiration date of February 24, 2010. As
of April 29, 2000, no warrants have been exercised.
6. Replacement of certain stock options grants with restricted stock
On March 24, 2000, the company authorized the exchange of certain stock
options, having an exercise price above $22 per share, for an economically
equivalent grant of restricted stock. The exchange, which was voluntary,
replaced approximately 14.4 million option shares with approximately 1.7
million restricted shares. Shares of restricted stock resulting from the
exchange vest over a period of three years, with one-half of the grant
vesting on April 1, 2002 and the remainder vesting on April 1, 2003.
Accordingly, the company will recognize compensation expense over the
vesting period.
7. Segments
<TABLE>
<CAPTION>
Information related to the various company segments is as follows:
-----------------------------------------------------------------------------
April 29, May 1,
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Net sales
Toys "R" Us - USA $ 1,242 $ 1,203
Toys "R" Us - International 305 315
Toys "R" Us - Japan 277 208
Babies "R" Us 327 266
Toysrus.com 8
Kids "R" Us 160 174
-----------------------------------------------------------------------------
Total $ 2,319 $ 2,166
-----------------------------------------------------------------------------
<FN>
</FN>
</TABLE>
6
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
==========================================================
(In millions)
----------------------------------------------------------------------
<CAPTION>
April 29, May 1,
2000 1999
<S> <C> <C>
----------------------------------------------------------------------
Operating earnings
Toys "R" Us - USA $ 42 $ 41
Toys "R" Us - International (20) (32)
Toys "R" Us - Japan 13 12
Babies "R" Us 30 21
Toysrus.com, net of minority interest (14)
Kids "R" Us 5 6
General corporate expenses (9) (5)
Interest expense, net (23) (16)
Gain from IPO of Toys"R"Us - Japan 315
----------------------------------------------------------------------
Earnings before taxes on income $ 339 $ 27
----------------------------------------------------------------------
<FN>
</FN>
</TABLE>
8.Restructuring and other charges
In 1998, the company recorded restructuring and other non-recurring charges
of $698 ($508 net of tax benefits) to strategically reposition its
worldwide business. See the company's Annual Report for the year ended
January 29, 2000 for details on these charges. Also see the section
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" in this report for an update on the initiatives and
the status of related reserves.
9. Commitments and contingencies
See Part II - Item I - Legal Proceedings.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
Results of Operations
Net sales increased 7% to $2.3 billion for the first quarter ended April
29, 2000, as compared with $2.2 billion for the first quarter ended May 1,
1999. The sales increase was primarily driven by increases in comparable
store sales versus the same period in 1999, as well as continued new store
growth.
Foreign currency had a favorable impact on net sales of approximately $8
million for the first quarter ended April 29, 2000, as compared with the
same period in 1999.
On a consolidated basis, comparable store sales, in local currencies,
increased by 3% for the first quarter of 2000, as compared with the first
quarter of 1999. Comparable store sales for the Toys "R" Us - USA division
increased by 2% for the first quarter of 2000, as compared with the first
quarter of 1999. This increase is reflective of improvements across a broad
range of categories that helped to offset the strong Furby business that
the company experienced upon its introduction last year. Internationally,
comparable store sales, on a local currency basis, increased 7% for the
first quarter of 2000, as compared with the first quarter of 1999. Strong
International sales performance was achieved in most merchandising
categories. The company's Babies "R" Us division had a comparable store
sales increase of 10% for the first quarter of 2000, as compared with the
first quarter of 1999, due to significant increases in most merchandising
categories, in particular the infant care and small toy categories. The
company's Kids "R" Us division experienced a decrease in comparable store
sales in the mid-single digits for the first quarter of 2000, as compared
with the first quarter of 1999.
On a consolidated basis, cost of sales, as a percentage of sales, decreased
by 0.5% for the first quarter of 2000, as compared with the first quarter
of 1999. Cost of sales as a percentage of sales for the Toys "R" Us - USA
division decreased 1% for the first quarter of 2000, as compared with the
first quarter of 1999, mostly due to improvements in initial markups and a
reduction in coupon expenses. Cost of sales as a percentage of sales for
the Toys "R" Us - International division increased by 0.6% for the first
quarter of 2000, as compared with the first quarter of 1999, largely due to
increased markdowns to keep the inventory fresh. Cost of sales as a
percentage of sales for the Babies "R" Us division decreased by 1.5% for
the first quarter of 2000, as compared with the first quarter of 1999,
largely due to a more favorable shift in the sales mix.
On a consolidated basis, selling, general and administrative expenses
(SG&A), as a percentage of sales, increased by 0.3% for the first quarter
of 2000, as compared with the first quarter of 1999. SG&A, as a percentage
of sales for the Toys "R" Us - USA division increased by 1.3% for the first
quarter of 2000, as compared with the first quarter of 1999. This increase
was partially due to increased payroll costs and increased distribution
costs. SG&A, as a percentage of sales for the International division
decreased by 2.5% for the first quarter of 2000, as compared with the first
quarter of 1999. This decrease is primarily due to the closing of
under-performing stores in Central Europe and France, which were included
in the company's restructuring program.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
SG&A, as a percentage of sales for the Babies "R" Us division increased by
0.3% for the first quarter of 2000, as compared with the first quarter of
1999.
Included in the company's results for the first quarter ended April 29,
2000, is $9 million representing net loss of Toysrus.com, its internet
subsidiary, net of minority interest.
Depreciation and amortization increased by $6 million for the first quarter
of 2000, as compared with the first quarter of 1999, as a result of the
company's continued store expansion, strategic investments to improve
management information systems and amortization of goodwill relating to its
acquisition of Imaginarium Toy Centers, Inc. in the second half of 1999.
Net interest expense increased by $7 million for the first quarter of 2000.
This increase was mostly due to higher average borrowings mainly
attributable to funding the company's stock repurchase program, as well as
higher interest rates.
Foreign currency exchange did not have a material impact on net earnings
for the first quarter of 2000, as compared with the same period in 1999.
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 29, 2000; the reserve balances and subsequent utilization are as
follows:
<TABLE>
<CAPTION>
Reserve Balance Reserve Balance
Description @ 1/29/00 Utilized @ 4/29/00
---------------------------------------------------------------------------
<S> <C> <C> <C>
Closings/downsizings:
Lease commitments $62 $ 10 $52
Severance and other closing costs 14 - 14
Other 11 - 11
---------------------------------------------------------------------------
Total restructuring $87 $ 10 $77
---------------------------------------------------------------------------
Provisions for legal settlements $30 $ 13 $17
---------------------------------------------------------------------------
<FN>
</FN>
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
The company is continuing to aggressively negotiate the closing/downsizing
of the remaining stores and distribution centers included in its
repositioning program and intends to execute the remainder of the
initiatives included in the program.
In 1998, the company also announced markdowns and other charges of $345
million ($229 million net of tax benefits, or $.86 per share). Unused
reserves at April 29, 2000 are expected to be utilized in the company's
upcoming business cycle. Details on the components of these charges are
described in the company's Annual Report for the year ended January 29,
2000; the reserve balances and subsequent utilization are as follows:
<TABLE>
<CAPTION>
Reserve Balance Reserve Balance
Description @ 1/29/00 Utilized @ 4/29/00
--------------------------------------------------------------------------
<S> <C> <C> <C>
Markdowns:
Clear excess inventory $ 2 $ 1 $ 1
Store closings 12 4 8
--------------------------------------------------------------------------
Total cost of sales $ 14 $ 5 $ 9
--------------------------------------------------------------------------
<FN>
</FN>
</TABLE>
The company believes all reserves are adequate to complete its
restructuring program.
Impact of Year 2000
The year 2000 problem concerns the inability of information systems to
recognize properly and process date-sensitive information beyond December
31, 1999. At the time of this filing the company had not experienced any
year 2000 problems with any of its financial or operating systems or with
any of its suppliers or customers. The company will continue to monitor
these systems, but it does not anticipate any problems or significant
expenditures in the future.
Financial Condition
By February 3, 2001, the company plans to operate
approximately 1,578 stores, consisting of: 709 toy stores in the United
States; 478 International toy stores (including 102 franchise and joint
venture stores); 197 Kids "R" Us children's clothing stores; 150 Babies "R"
Us stores and 44 Imaginarium stores. The company expects to convert more
than 70 existing USA toy stores to C-3 combo stores in 2000. In addition,
the company continues its C-3 store refinement program aimed to find the
optimal configuration of fixturing and segmentation. The company also sells
merchandise through its internet sites at www.toysrus.com and
www.imaginarium.com and through mail order catalogs.
For 2000, capital requirements for the company's expansion plans mentioned
above, as well as capital requirements for its subsidiary, toysrus.com, are
estimated to be approximately $500 to $550 million.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Total borrowings, net of cash and cash equivalents decreased by
approximately $460 million at April 29, 2000, as compared with May 1, 1999
due primarily to the deconsolidation of Toys - Japan.
The company repurchased approximately 18 million shares of its common stock
through its share repurchase program for approximately $227 million during
the first quarter of 2000, as compared to 3 million shares 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 shares outstanding decreased to 231.4 million
during the first quarter ended at April 29, 2000 from 249.3 million during
the first quarter ended May 1, 1999, due primarily to the impact
of shares repurchased by the company under its share repurchase program.
The company recorded a non-operating gain of $315 million ($200 million net
of taxes) resulting from the initial public offering of shares of Toys -
Japan, which was completed on April 24, 2000. Of this gain $91 million
resulted from an adjustment to the basis of the company's investment in
Toys - Japan and $224 million related to the sale of a portion of Toys -
Japan's common stock owned by the company. In connection with this
transaction the company also received net cash proceeds of $267 million and
recorded a provision for current income taxes of $82 million and a deferred
income tax liability of $33 million. Accordingly, the company's ownership
percentage in Toys - Japan was reduced from 80% to 48% and Toys - Japan
will now operate as a licensee of the company.
The company has not included the balance sheet of Toys-Japan in
its consolidated balance sheet as of April 29, 2000. Accordingly, the
cash flows resulting from the change in the assets and liabilities of
Toy-Japan have been excluded from the company's condensed consolidated
statement of cash flows for the 13 weeks ended April 29, 2000. In
addition, beginning with the second quarter of 2000, the company will
no longer consolidate the operating results of Toys - Japan and will
use the equity method to account for this investment.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Forward Looking Statements
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 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 that involve
inherent risks and uncertainties. Actual results may differ materially from
those contained in any forward-looking statement.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
1) FAO Schwarz, et al. v. Toys "R" Us, Inc., et al.
As previously reported in the company's Report on Form 10-K for the
fiscal year ended January 29, 2000, the company is a defendant in
litigation pending in the Supreme Court of the State of New York, New
York County.
On May 31, 2000, the court denied plaintiff's motion for a
preliminary injunction.
13
<PAGE>
Item 6. Exhibit and Report on Form 8-K
(a) Exhibit
27.1 - Financial Data Schedule for the quarter ended
April 29, 2000.
(b) Report on Form 8-K
On March 20, 2000, the company filed a Form 8-K in
connection with the proposed initial public offering
in Japan of shares of Toys "R" Us -Japan, Ltd.
14
<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 9, 2000 Toys "R" Us, Inc.
-----------------------------
(Registrant)
s/ Louis Lipschitz
-----------------------------
(Signature)
Louis Lipschitz
Executive Vice President and
Chief Financial Officer
15
