There's a new top boss at the retail world's biggest toy store chain, and his hire might signal that investors will finally get another chance to play with Toys "R" Us stock after a long wait.
The IPO window has been wide open for most of the past several years -- putting the six-week post-Facebook freeze aside -- and yet one long-awaited deal is still on the sidelines. Toys "R" Us remains private even as most of its peers in the pre-crisis class of leveraged buyouts have been sold out of private equity portfolios. Now, with IPO veteran David Brandon taking the helm, the countdown is on once again for the toy seller to return to the public market.
Brandon joins Toys "R" Us after resigning as the University of Michigan's athletic director last fall, but the jump from intercollegiate sports back into business isn't as extreme as it sounds. For one thing, big-time college football and basketball are big-time business these days and for another Brandon's career before returning to his alma mater was spent leading companies on the path to public offerings.
Over 11 years at Domino's Pizza, Brandon helped steer the company to the largest IPO in restaurant history (he still serves as chairman at the pizza chain). Before that he ran Valassis Communications, which he also brought public. Now he joins a debt-burdened business that has struggled since a highly-publicized false start toward an IPO in recent years.
The saga dates back to before the financial crisis. In 2005, Toys "R" Us agreed to a $6.6 billion buyout from a private equity consortium of KKR, Bain Capital and
That deal never got off the ground though. After twisting in the wind for several years, as key executives defected and sales continued to turn sour, Toys "R" Us withdrew its filing in March 2013. Around the same time Gerald Storch, who was brought in to lead the company at the time of the PE takeover, stepped down as CEO. He was replaced months later by Antonio Urcelay, a longtime company veteran, who now gives way to Brandon.
"I consider it a tremendous privilege to assume this important leadership role at Toys“R”Us, one of the most well-known retail brands in the world," Brandon said in the release announcing his hiring. "I believe our best days are ahead of us and I’m eager to get started."
Those better days will likely include another crack at going public, but Brandon and the company are keeping mum on that front for the moment.
"Our focus remains on further strengthening the foundation of the company in order to achieve sustainable growth in the future," a Toys "R" Us spokesperson said. "We have not put a timetable on achieving this potential. As we drive topline sales consistently and improve on other important metrics, the rest should follow."
With the 10-year anniversary of the buyout approaching the retailer's private equity owners are already sitting on an investment with a longer-than-typical holding period.
The yet-to-happen Toys "R" US IPO hasn't been without controversy either. Last December, FINRA fined 10 Wall Street firms for trying to win roles on the planned 2010 offering by allowing research analysts to offer favorable coverage in return for roles on the deal.
Brandon's challenge will be to complete a turnaround of Toys "R" Us in a challenging competitive environment that has proven difficult for the debt-laden retail chain.
Holiday quarter sales fell 2.7% on a comparable store basis, the company reported in January, though gross margins improved thanks to more disciplined promotional efforts and pricing strategies. International sales grew 1.2% during the holiday 2014 period, but foreign currency impacts could take a bite out of further growth abroad. In March, the company said its full-year 2014 net sales inched up 0.5% to $12.4 billion, but that figure did not include a $243 million currency hit.
In a note to clients in May, Citi's credit analysts warned that the company's first quarter faced a challenging year-over-year comparison given the strength from toys tied to the film Frozen a year ago, while an improved website and mobile app might help performance this year.
In the fall, Moody's maintained its negative view on Toys "R" Us' credit profile, even as new bond issuance pushed its debt maturities out to 2017. "The negative outlook reflects Moody's view that the company will be challenged to improve its operating performance meaningfully," the firm said. Couple that with a weak credit profile "which remains hamstrung by the significant levels of LBO debt that still remain, making reductions in debt/EBITDA to below 6 times difficult to envision in the foreseeable future."
Toys "R" Us may be in something of a race against the clock, having been unable to substantially improve its debt positioning at a time of historically low interest rates for high-yield issuers in general. Many bondholders expect those conditions to reverse when the Federal Reserve ultimately starts raising interest rates, and likely in advance of that action.
Moody's was a bit more sanguine on the company's business prospects in the fall, noting that while Toys "R" Us is "challenged by a formidable set of competitors like