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PrintDid Toys "R" Us have to fail? Did the company have to be liquidated?
The answer is definitively, yes. There was, in the end, no reason for being for the chain. It offered nothing special, not the lowest price, not the best selection, not the best service, not the best locations.
Just nothing.
Today some are mourning what will end up being the liquidation of the store, which had been a staple for more than 60 years.
They should have been in mourning for the last two decades. Yes, it has been that bad for that long, much longer than when it went private 12 years ago and loaded up the balance sheet with more than $7.5 billion in debt.
I've heard a lot in the last 24 hours about how Toys "R" Us could have survived if Bain Capital, KKR and Vornado hadn't taken on all of that debt to go private in 2005.
I can understand that logic. At the same time that Toys -- as we always called it on the trading floor -- went private so did Dollar General and Burlington Coat Factory and those two companies used their private time fixing up their stores and becoming more focused. They then came public again and made you fortunes. Dollar General's (DG) stock has gone from $21 in 2009 to $85 now. Burlington's (BURL) been even more spectacular, going from $17 in 2013 to $127 as of today.
Spectacular.
But I think that Toys was doomed at the turn of the century -- something the stagnant sales and stock price shows from back then because Walmart (WMT) and Target (TGT) decided to "own" the physical store business while Amazon (AMZN) actually partnered with Toys "R" Us at the same time. Both Walmart and Target decided to price all of the hottest selling toys under the price of Toys "R" Us while Amazon, which had made Toys "R" Us its exclusive toy vendor 2000, took the knowledge it needed from the company and began offering toys itself at much lower prices than Toys "R" Us could ever do.
And that was all before the private equity firms thought they were smart enough to turn the chain around by removing it from the glare of the public markets.
But let's step back in time and realize the history of what went on here. At one point, in the 1980s, Toys "R" Us was one of the greatest growth stories of our time. That's because it was the category killer cleaning up against what were basically tens of thousands of mom-and-pop toy stores around the country.
It was one of my greatest longs during that period because my father sold boxes, printed bags, scotch tape and gift wrap to most of those mom-and-pop stores in the Philadelphia area. Pop would tell me about each of his toy-store client bankruptcies and I would tell my clients to buy the heck out of the darned thing and keep buying until every last one of those family stores got wiped out.
At the same time these mom-and-pop stores were struggling the toy companies started merging to the point where the universe was pretty much divided into Mattel (MAT) and Hasbro (HAS) . Toys "R" Us could get better prices because of its scale, sealing the fate of even the best run of the family businesses. I remember one of these clients telling my father that he could buy Mattel toys at a Toys "R" Us cheaper than it cost him to buy the toys directly from Mattel. Such was the incredible advantage of the category killer.
But, almost like clockwork, when these niggling competitors failed, Walmart and Target decided to do the same thing to Toys "R" Us that it did to my dad's clients, offering the hottest toys at prices that Toys "R" Us couldn't beat or didn't want to match and you started seeing the tell-tale decline in same-store sales that amounts to the death rattle for a retailer. Essentially Toys "R" Us was done when it had a two percent same-store sales decline in the 1999 Christmas season.
What's the most amazing thing about this chain? I would say that it lasted as long as it did. It could not compete in any category that mattered, price, location, speed, brands, and certainly not service, you name it.
Sure, it could have hung on if it had less debt. But in the end, like so many category killers it got killed by smarter, better operators. You know what the real bottom line, the ironic bottom line is? Walmart, Target and Amazon all coalesced to kill Toys "R" Us, but if you are at Walmart or Target right now and you are reading the Toys obituary, you have to wonder, one day, if you don't keep innovating and cutting price and adding better service and ease of use, could you be next?
