English
“In 1948, a young and ambitious man named Charles Lazarus took over his father’s Washington, D.C., bicycle shop. Lazarus tried selling children’s furniture, but he soon changed to toys, as he later told the New York Times, “after realizing that toys broke and had to be replaced.” In 1957, he opened the first of his stores using the Toys R Us name. Less than a decade later, Lazarus sold his four toy stores to Interstate Department Stores, which had aspirations to become one of the largest toy merchants in the United States; Lazarus stayed on to run the business.
Interstate purchased another toy chain, the prosaically named Children’s Bargain Town, but it recognized that Lazarus had a knack for speaking directly to children, and it eventually rechristened all its toy stores Toys R Us. They sold G.I. Joes, Barbies, and Lite-Brites. In advertisements featuring a giraffe mascot, the “R” spun goofily backward, like an outtake from a kindergarten spelling test. Over time, the giraffe became younger and friendlier, evolving from Dr. G. Raffe to Geoffrey, a family guy with a wife, Gigi, and a couple of calves.
The company expanded aggressively; faltered under too much debt; locked horns with Kmart, and came away battered. In 1974, it filed for bankruptcy protection. Four years later, Interstate emerged as Toys R Us. Again, Lazarus led it. He had a plan to open discount-children’s-clothing stores called Kids R Us. By 1983, his annual compensation was forty-three million dollars, making him one of the highest-paid executives in the nation.
The nostalgia for Toys R Us that swelled late Monday, when the company sought Chapter 11 bankruptcy reorganization, tended to recall the chain in its nineteen-eighties heyday, with holiday lines stretching outside its stores and Lazarus flush with money and audacious dreams. Adults who grew up in that decade can reminisce about poring over the Christmas catalogue, circling photos of wished-for Transformers, Pound Puppies, and My Little Ponies. Parents who once desperately searched the aisles for Cabbage Patch Kids remember their children’s cries of delight when they tore off the wrapping paper.
Lazarus retired in 1994, as his business reached more than a thousand stores and competition encroached again. Walmart surpassed Toys R Us in toy sales by 1998, when customers were ransacking shelves for the Furby. Kids R Us began shutting down in 2003. The next year, with sales fading, executives tried to sell the toy stores and keep a stronger chain, Babies R Us, which stocked car seats, cribs, and layette sets. The share price of Toys R Us rose fifty per cent after it announced it was seeking the deal, and a bidding war ensued for the entire company. In 2005, it was purchased by a group of familiar financial names: Bain Capital, K.K.R., and Vornado Realty Trust, a real-estate-investment company (most widely recognized today as a major investor in 666 Fifth Avenue, of Kushner-family fame). This trio paid a total of 6.6 billion dollars. The chief executive of Toys R Us, John H. Eyler, Jr., who had come over from rival F.A.O. Schwarz, received sixty-five million dollars.
Bain, co-founded by the former Republican Presidential nominee Mitt Romney, and K.K.R. are two of the best-known private-equity firms, which use investors’ funds and inexpensive debt to take control of businesses in leveraged buyouts. In the mid-aughts, private-equity firms were racing to complete deals ahead of their competition. Credit was so easy, and concerns about risk so distant, that economists referred to the period as the “Great Moderation.” In their search for higher returns, investors shuffled around great gobstoppers of money.
Under its new owners, Toys R Us reorganized its corporate structure, splitting off its real-estate assets to make itself more attractive to lenders, which then enabled it to sustain higher debt levels. Meanwhile, Geoffrey the Giraffe regressed, Benjamin Button–style, to a babyish character drawn in a faux-naïve hand, with dinner-plate eyes and stars instead of spots. Gigi hasn’t been seen since the nineteen-nineties.
Two years after the buyout, the financial crisis began. As with the crash that follows an epic sugar high, the company—and the country—have paid dearly for the binge. For years, Toys R Us managed to keep refinancing its Chutes and Ladders tangle of debt obligations, though it had to skimp in other areas, such as investing in its stores and its online operations. In this feat, it outlasted many of its customers, whose subprime mortgages unravelled much more quickly, leaving children celebrating Christmas in unfamiliar places, and parents unable to afford gifts, even on layaway.
For private-equity firms, a common exit strategy is to cash out their investment in an initial public offering. In 2010, the owners of Toys R Us filed plans to raise eight hundred million dollars in a stock sale. Those plans fell through, and now Bain, K.K.R., and Vornado stand to have 1.3 billion dollars in equity wiped out, according to Bloomberg, which added that the three owners partially offset those losses by collecting four hundred and seventy million dollars over the years in fees and interest payments from Toys R Us. At the time of its Chapter 11 filing, Toys R Us estimated its debt at more than five billion dollars. It was paying four hundred million dollars a year to service that debt—far more than it was spending on its stores and computer systems.
Media reports this week blamed the failure of Toys R Us, in part, on the rise of online shopping—and, implicitly, Amazon, which dominates the online space. But by the time Walmart moved past Toys R Us, in the late nineties, Amazon was only four years old, and was just beginning to expand beyond books.
On Tuesday, the chief executive of Toys R Us, David A. Brandon, filed a statement with the bankruptcy court that opened with the retailer’s theme song: “I don’t want to grow up, I’m a Toys R Us kid / There’s a million toys at Toys R Us that I can play with.” He lingered on the fun parts, like the size of the global toy market (eighty-seven billion dollars) and the company’s brand recognition, but skipped over the details of how it acquired its nasty debt problem. With new financing, Brandon explained, Toys R Us will renovate its stores with rooms for children’s birthday parties, and develop augmented-reality video games that customers must experience in person.
The corporate history found on the Toys R Us Web site doesn’t mention the Interstate bankruptcy or the other unpleasant chapters. Marketing, like childhood, requires fantasy, and a certain amount of denial. But there’s something admirable about the persistence of Charles Lazarus and his successors. Retail is a fragile, fickle business, prone to reversals and creative rebirth.
The downfall of Toys R Us calls to mind failed chains, like KB Toys, which Bain took over in 2000. It filed for bankruptcy protection twice, and closed in 2009. F.A.O. Schwarz, too, twice sought bankruptcy reorganization during the same decade. It’s no wonder that Tom Hanks’s character in the movie “Big,” finding himself transformed into an adult, wants to get out of the toy business and go back to being a kid. In real life, where time runs in one direction and the bills have to be paid, Toys R Us bought F.A.O. Schwarz, in 2009. It shuttered the famous F.A.O. Schwarz store in Manhattan, the brand’s last location, in 2015. Macy’s bought the big piano from the movie and put it in its basement. The grownup kids can visit it for old times’ sake. The new kids are on to the next thing.”
Source: https://www.newyorker.com/business/currency/how-toys-r-us-succumbed-to-its-nasty-debt-problem