{"id":62258,"date":"2018-02-05T21:26:38","date_gmt":"2018-02-05T21:26:38","guid":{"rendered":"http:\/\/www.bnreport.com\/who-killed-toys-r-us\/"},"modified":"2018-02-05T21:26:38","modified_gmt":"2018-02-05T21:26:38","slug":"who-killed-toys-r-us","status":"publish","type":"post","link":"https:\/\/www.bnreport.com\/en\/who-killed-toys-r-us\/","title":{"rendered":"Who killed Toys \u2018R\u2019 Us?"},"content":{"rendered":"

Toys \u2018R\u2019 Us, the $6.9bn (\u00a35bn) toy-store chain, became one of US retail\u2019s biggest-ever bankruptcies when it filed for so-called \u2018Chapter 11 protection\u2019 last September.<\/p>\n

Market watchers were quick to point the finger of suspicion at Amazon<\/a>. But is that right?<\/p>\n

In the spirit of Agatha Christie, we ask: who killed Toys \u2018R\u2019 Us? <\/p>\n

In 2005, one potential suspect entered the drama. Toys \u2018R\u2019 Us hired Credit Suisse<\/a> to find a potential buyer and private equity answered the call. As this Financial Times article<\/a> sets out, three firms put in $1.4bn in cash, split equally, and borrowed more than $5bn to finance the transaction.<\/p>\n

Over the next decade, low interest rates enabled the consortium to return to the debt market several more times to refinance the deal as the three firms sought to engineer some kind of exit.<\/p>\n

That never materialised. In 2010, a planned floatation never got off the ground and.<\/p>\n

Faced with the need to raise $1bn before Christmas, Toys \u2018R\u2019 Us filed for Chapter 11.<\/p>\n

Clearly the group was facing structural pressures as consumers changed the way they shopped \u2013 annual sales shrank from $13.7bn in 2008 to $11.5bn in 2016, for example, while profits have halved since 2009.<\/p>\n

So that did not help but the obvious culprit was \u2026 Poirot pauses for effect, the camera pans round the room and comes to a halt on private equity as Poirot finally says: \u201cEet was you \u2026 debt.\u201d<\/p>\n

Ah \u2013 classic Christie misdirection.<\/p>\n

Unnoticed back in 2005, debt had entered proceedings almost hand in hand with private equity. And of course debt never travels alone \u2013 interest rates are always at its side.<\/p>\n

Even with interest rates at all-time lows, Toys \u2018R\u2019 Us was spending more than $250m a year servicing some $5bn of long-term debt and that is just not sustainable.<\/p>\n

This is why value investors spend so much time analysing the financial position of potential investments \u2013 including how much debt has been taken on.<\/p>\n

What we are looking for is a \u2018margin of safety\u2019 \u2013 or \u2018wiggle room\u2019, if you prefer \u2013 should things turn sour for a company. Businesses that have a margin of safety have the luxury of time or breathing space to reinvent themselves \u2013 and many do precisely that.<\/p>\n

On an individual basis, if Toys \u2018R\u2019 Us had not been so laden with debt then maybe it could have avoided filing for bankruptcy and reinvented itself \u2013 or maybe not. But without that margin of safety, it never had the chance to find out. Debt was the killer. The case \u2013 eet is solved.<\/p>\n