TOYS R US, INC. REPORTS RESULTS FOR SECOND QUARTER 2016 (September 13, 2016)

- Operating earnings improved by $3 million to $18 million
- International same store sales grew for the tenth consecutive quarter
- Net Leverage1 was 6.0x, an improvement of 0.6x versus prior year

WAYNE, NJ (September 13, 2016) - Toys“R”Us, Inc. reported financial results for the second quarter ended July 30, 2016. Consolidated same stores sales increased by 0.5% and operating earnings improved to $18 million from $15 million.  In addition, the company successfully reached an agreement to refinance all of its Toys“R”Us, Inc. 2017 notes and a portion of its 2018 maturities.

"We are pleased with our successful refinancing activities which will further strengthen the company’s financial foundation. This will enable us to continue to execute on our operational turnaround and compete in what continues to be a challenging retail environment" said Dave Brandon, Chairman and Chief Executive Officer, Toys R Us, Inc. "As we enter the critical holiday season, we are focused on creating a world class shopping experience and ensuring that we consistently deliver the products our customers want, regardless of when and how they want to shop with us."

Second Quarter Highlights

- Consolidated same store sales increased 0.5%. International grew by 1.2%, driven by strength in the Canada and Asia Pacific markets. Domestic same store sales were flat with improvements in the seasonal and core toy categories, offset by decreases in the entertainment and baby categories. Domestic e-commerce sales were up 15%.

- Consolidated net sales were $2,282 million, a decrease of $11 million compared to the prior year period. Excluding a $13 million favorable impact from foreign currency translation net sales declined by $24 million. The decrease was mainly attributable to Domestic store closures, which included the last FAO Schwarz store and our Times Square flagship store, partially offset by International same store sales growth.

- Gross margin dollars were $862 million, a decline of $13 million compared to the prior year period. Excluding a $4 million favorable impact from foreign currency translation, gross margin dollars decreased by $17 million. Gross margin rate was 37.8%, a decrease of 40 basis points. Domestic gross margin rate declined by 70 basis points, primarily due to an increase in e-commerce sales coupled with lowering our free shipping threshold. International gross margin rate remained consistent with prior year.

SG&A was $783 million, a decrease of $13 million compared to the prior year period. Excluding a $3 million unfavorable impact from foreign currency translation, SG&A decreased by $16 million, largely due to a decline in flagship store occupancy costs.

- Operating earnings were $18 million, compared to $15 million in the prior year period. Excluding a $2 million favorable impact from foreign currency translation, International segment operating earnings improved by $11 million, mainly due to an increase in gross margin dollars and a reduction in operating expenses. Domestic segment operating earnings declined by $18 million, mainly as a result of reduced gross margin dollars. Corporate overhead decreased by $8 million.

- Adjusted EBITDA2 for the quarter decreased by $1 million to $121 million, compared to $122 million in the prior year period.

- Net loss improved by $4 million to $95 million, compared to $99 million in the prior year period.

 Liquidity and Capital Spending

The company, including Toys“R”Us-Delaware, Inc., ended the second quarter with total liquidity of $1.0 billion, which was comprised of cash and cash equivalents of $420 million and availability under committed lines of credit of $571 million.  Toys“R”Us-Delaware, Inc. ended the quarter with $557 million of liquidity, which was comprised of cash and cash equivalents of $174 million and availability under its revolving line of credit of $383 million.

Through the end of the second quarter, capital spending was $95 million, compared to $82 million in the prior year, an increase of $13 million.

As previously announced, on August 16, 2016, the company completed the offering to exchange the outstanding 10.375% senior notes due 2017 (the “2017 Notes”) and 7.375% senior notes due 2018 (the “2018 Notes”) for new 12% senior secured notes due 2021 (the “New Secured Notes”). On August 26, 2016, additional New Secured Notes were issued in a private placement. Altogether, $583 million of New Secured Notes were issued and $110 million in cash consideration was paid. As a result of the exchange and private placements, the company will redeem all of the outstanding 2017 Notes and $192 million of the 2018 Notes, with the remaining net cash proceeds available for general corporate purposes, including repayment of other indebtedness.

¹ Net Leverage represents total debt outstanding less cash and cash equivalents and restricted cash attributed to debt as of the end of the quarter, divided by LTM Adjusted EBITDA.
² A detailed description and reconciliation of EBITDA and Adjusted EBITDA for Toys“R”Us, Inc. and Toys“R”Us-Delaware, Inc., and management’s reasons for using these measures, are set forth at the end of this press release. LTM Adjusted EBITDA represents Adjusted EBITDA for the last twelve months

About Toys“R”Us, Inc.

Toys“R”Us, Inc. is the world’s leading dedicated toy and baby products retailer, offering a differentiated shopping experience through its family of brands. Merchandise is sold in 875 Toys“R”Us and Babies“R”Us stores in the United States, Puerto Rico and Guam, and in more than 765 international stores and over 245 licensed stores in 37 countries and jurisdictions. With its strong portfolio of e-commerce sites including Toysrus.com and Babiesrus.com, the company provides shoppers with a broad online selection of distinctive toy and baby products. Toys“R”Us, Inc. is headquartered in Wayne, NJ, and has an annual workforce of approximately 62,000 employees worldwide. The company is committed to serving its communities as a caring and reputable neighbor through programs dedicated to keeping kids safe and helping them in times of need. For more information, visit Toysrusinc.com or follow @ToysRUsNews on Twitter.

Forward-Looking Statements

All statements that are not historical facts in this press release, including statements about our beliefs or expectations, are forward-looking statements. These statements are subject to risks, uncertainties and other factors, including, among others, the seasonality of our business, competition in the retail industry, changes in our product distribution mix and distribution channels, general economic factors in the United States and other countries in which we conduct our business, consumer spending patterns, birth rates, our ability to implement our strategy including implementing initiatives for season, our ability to recognize cost savings, implementation and operation of our new e-commerce platform, marketing strategies, the availability of adequate financing, ability to repatriate cash from our foreign operations, ability to distribute cash from our operating subsidiaries to their parent entities, access to trade credit, changes in consumer preferences, changes in employment legislation, our dependence on key vendors for our merchandise, political and other developments associated with our international operations, costs of goods that we sell, labor costs, transportation costs, domestic and international events affecting the delivery of toys and other products to our stores, product safety issues including product recalls, the existence of adverse litigation, changes in laws that impact our business, our substantial level of indebtedness and related debt-service obligations, restrictions imposed by covenants in our debt agreements and other risks, uncertainties and factors set forth in our reports and documents filed with the Securities and Exchange Commission (which reports and documents should be read in conjunction with this press release). In addition, we typically earn a disproportionate part of our annual operating earnings in the fourth quarter as a result of seasonal buying patterns and these buying patterns are difficult to forecast with certainty. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update these statements in light of subsequent events or developments unless required by the Securities and Exchange Commission’s rules and regulations. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

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For more information please contact:

Lenders and Note Investors:

Chetan Bhandari, Senior Vice President, Corporate Finance & Treasurer at 973-617-5841 or Chetan.Bhandari@toysrus.com

Media:

Amy von Walter, Executive Vice President, Global Communications & Public Relations at 201-815-9512 or Amy.vonWalter@toysrus.com 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

OPERATING METRICS
(Unaudited)

(1) Consists primarily of non-product related revenues.
(2) Excludes the impact of foreign currency translation.
(3) Consists primarily of non-product related revenues, including licensing revenue from unaffiliated third parties.

Non-GAAP Disclosure of EBITDA and Adjusted EBITDA

We believe Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.  Investors in the Company regularly request Adjusted EBITDA as a supplemental analytical measure to, and in conjunction with, the Company’s financial data prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).  We understand that investors use Adjusted EBITDA, among other things, to assess our period-to-period operating performance and to gain insight into the manner in which management analyzes operating performance.

In addition, we believe that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA and Adjusted EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which items may vary for different companies for reasons unrelated to overall operating performance.  We use the non-GAAP financial measures for planning and forecasting and measuring results against the forecast and in certain cases we use similar measures for bonus targets for certain of our employees.  Using several measures to evaluate the business allows us and investors to assess our relative performance against our competitors.

Although we believe that Adjusted EBITDA can make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies, even in the same industry, may define Adjusted EBITDA differently than we do.  As a result, it may be difficult to use Adjusted EBITDA or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to our performance.  The Company does not, and investors should not, place undue reliance on EBITDA or Adjusted EBITDA as measures of operating performance.

Reconciliation of Net loss attributable to Toys “R” Us, Inc. to EBITDA and Adjusted EBITDA is as follows:

A reconciliation of Net (loss) earnings to EBITDA and Adjusted EBITDA for Toys “R” Us-Delaware, Inc. is as follows:

(a) Represents the incremental compensation expense related to certain one-time awards and modifications, net of forfeitures of certain officers’ awards.
(b) Represents expenses associated with the transition of our U.S. e-commerce operations and other transaction costs.
(c) Represents the unrealized loss (gain) on foreign exchange related to the re-measurement of the portion of the Tranche A-1 loan facility attributed to Toys-Canada.
(d) Represents the fees expensed to our Sponsors in accordance with the advisory agreement. In June 2015, the advisory agreement was amended in order to reduce the advisory fees payable in fiscal 2015 and thereafter from $17 million to $6 million annually.
(e) Represents certain litigation expenses and settlements recorded for legal matters.
(f) Represents property losses and insurance claims recognized.
(g) Represents store closure costs, net of lease surrender income.
(h) Adjusted EBITDA is defined as EBITDA (earnings (loss) before net interest income (expense), income tax expense (benefit), depreciation and amortization), as further adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance including certain items which are generally non-recurring. We have excluded the impact of such items from internal performance assessments. We believe that excluding items such as Sponsors’ management and advisory fees, asset impairment charges, severance, impact of litigation, store closure costs, noncontrolling interest, net gains on sales of properties and other charges, helps investors compare our operating performance with our results in prior periods. We believe it is appropriate to exclude these items as they are not related to ongoing operating performance and, therefore, limit comparability between periods and between us and similar companies.

Writer's Bio: Driven by a fascination with how young people learn, grow, and connect, Laura N. Larsson has spent years researching the role of play and social media in child and adolescent development. Since 2012, she has combined her ecommerce background with in-depth interviews of children and teenagers, producing insightful articles that explore the evolving interplay between play, communication, and online interaction. Read more articles by this author