2
===================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
============
FORM 10-Q
============
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2002
============
Commission file number 1-11609
TOYS "R" US, INC.
Incorporated pursuant to the Laws of Delaware
============
Internal Revenue Service - Employer Identification No. 22-3260693
461 From Road, Paramus, New Jersey, 07652
(201) 262-7800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes [ ] No [X]
212,472,227 shares of the registrant's Common Stock were outstanding on
August 30, 2002.
====================================================================
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.............................. 2
Condensed Consolidated Statements of Operations.................... 3
Condensed Consolidated Statements of Cash Flows................... 4
Notes to Condensed Consolidated Financial
Statements..............................................................5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition....................................11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.........17
Item 6. Exhibits and Reports on Form 8-K........................... 17
SIGNATURES.................................................................. 18
CERTIFICATIONS...............................................................19
1
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
==========================================
(In millions)
ASSETS August 3, August 4, February 2,
- ------
2002 2001 2002
----------------- ------------------ ----------------
Current Assets:
Cash and cash equivalents $ 449 $ 268 $ 283
Accounts and other receivables 162 164 210
Merchandise inventories 2,466 2,437 2,041
Other current assets 104 104 97
----------------- ------------------ ----------------
Total current assets 3,181 2,973 2,631
Property and equipment, net 4,668 4,380 4,544
Goodwill, net 348 354 348
Other assets 633 509 553
----------------- ------------------ ----------------
$ 8,830 $ 8,216 $ 8,076
================= ================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 98 $ 495 $ -
Accounts payable 1,027 1,036 878
Accrued expenses and
other current liabilities 543 516 777
Income taxes payable 284 213 345
----------------- ------------------ ----------------
Total current liabilities 1,952 2,260 2,000
Long-term debt 2,401 1,926 1,816
Deferred income taxes 396 401 395
Other non-current liabilities 311 194 398
Minority interest in Toysrus.com 47 63 53
Stockholders' equity 3,723 3,372 3,414
----------------- ------------------ ----------------
$ 8,830 $ 8,216 $ 8,076
================= ================== ================
See notes to the condensed consolidated financial statements.
2
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
===================================================
(In millions, except per share data)
13 Weeks Ended 26 Weeks Ended
--------------------------- ----------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
----------- ----------- ----------- ------------
Net sales $ 2,070 $ 2,021 $ 4,165 $ 4,082
Cost of sales 1,400 1,360 2,813 2,756
----------- ---------- --------- -----------
Gross margin 670 661 1,352 1,326
Selling, general and
administrative expenses 590 604 1,171 1,194
Depreciation and
amortization 77 73 156 146
--------- ---------- --------- ------------
Total operating expenses 667 677 1,327 1,340
--------- ---------- --------- -------------
Operating earnings/(loss) 3 (16) 25 (14)
Interest expense - net (30) (30) (58) (60)
--------- ---------- ---------- ------------
Loss before income taxes (27) (46) (33) (74)
Income tax benefit (10) (17) (12) (27)
---------- --------- ---------- ----------
Net loss $ (17) $ (29) $ (21) $ (47)
========== ========== ========== ===========
Basic and diluted loss
per share $ (0.08) $ (0.15) $ (0.10) $ (0.24)
========== ========== =========== ============
Weighted average basic and
diluted shares outstanding 208.6 198.4 202.8 198.0
========= ========== =========== ============
See notes to the condensed consolidated financial statements.
3
================================================================================
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
====================================================
(In millions)
26 Weeks Ended
---------------------------------------
August 3, 2002 August 4, 2001
--------------- ------------------
Cash Flows from Operating Activities:
Net loss $ (21) $ (47)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 156 146
Minority interest in Toysrus.com and othe (10) (11)
Changes in operating assets and liabilities:
Merchandise inventories (398) (144)
Accounts payable and other
operating liabilities (124) (463)
Other operating assets 18 39
--------------- ------------------
Net cash from operating activities (379) (480)
--------------- ------------------
Cash Flows from Investing Activities:
Capital expenditures, net (199) (296)
--------------- ------------------
Cash Flows from Financing Activities:
Short-term borrowings, net 98 (92)
Long-term borrowings 548 1,214
Long-term debt repayment (135) (388)
Proceeds from issuance of stock
and contracts to purchase stock 266 -
Exercise of stock options - 18
--------------- ------------------
Net cash from financing activities 777 752
--------------- ------------------
Effect of exchange rate changes
on cash and cash equivalents (33) 17
Cash and cash equivalents:
Increase / (decrease) during period 166 (7)
Beginning of period 283 275
--------------- ------------------
End of period $ 449 $ 268
=============== ==================
Supplemental disclosures of cash flow information:
Net income tax payments / (refunds) $ 7 $ (11)
=============== ==================
Interest paid $ 29 $ 45
=============== ==================
See notes to the condensed consolidated financial statements.
4
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
==========================================================
1. Interim reporting
The interim condensed consolidated financial statements are unaudited
and are subject to year-end adjustments. However, in the opinion of
management, all known adjustments (which consist primarily of normal
recurring accruals) have been made and the interim financial statements
present fairly the consolidated financial condition and operating
results for the unaudited periods. Because of the seasonal nature of
the company's business, results for interim periods are not indicative
of results to be expected for the fiscal year.
The financial statements and notes are presented in accordance with the
rules and regulations of the Securities and Exchange Commission and do
not contain certain information included in the company's annual
report. Therefore, the interim statements should be read in conjunction
with the company's annual report for the fiscal year ended February 2,
2002.
2. Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. Comprehensive income
Comprehensive loss was ($10) million and ($31) million for the quarters
ended August 3, 2002 and August 4, 2001, respectively, primarily as a
result of the net loss in addition to the change in foreign currency
translation. Comprehensive income / (loss) was $18 million and ($65)
million for the 26 weeks ended August 3, 2002 and August 4, 2001,
respectively, also primarily as a result of the change in foreign
currency translation, in addition to the net loss.
4. Investment in Toys - Japan
The company accounts for its investment in the common stock of Toys -
Japan on the "equity method" of accounting since the initial public
offering on April 24, 2000. As part of the initial public offering,
Toys - Japan issued 1,300,000 shares of new common stock to the public
at a price of 12,000 yen or $113.95 per share. Subsequently, the common
stock of Toys - Japan split 3 for 1, in November 2001. The company's
accounting policy for the sales of subsidiaries' stock is to recognize
gains or losses for value received in excess of or less than its basis
in such subsidiary. At the present time, no similar issuances of
subsidiaries' stock are under consideration. The carrying value of the
investment is reflected on the condensed consolidated balance sheets as
part of "Other assets." At August 3, 2002, the quoted market value of
the company's investment was $324 million, which exceeds the carrying
value of the investment. The valuation represents a mathematical
calculation based on the closing quotation published by the Tokyo
over-the-counter market and is not necessarily indicative of the amount
that could be realized upon sale. The company is a guarantor of 80% of
a 10 billion yen ($84 million) loan from third parties in Japan with an
annual rate of 6.47%, due in 2012, for which Toys - Japan is the
primary borrower.
5. Toysrus.com
Toysrus.com operates a co-branded toy and video games on-line store,
which was launched in the third quarter of 2000, a co-branded baby
products on-line store (Babiesrus.com), which was launched in May 2001,
and a co-branded learning products and information on-line store
(Imaginarium.com), which was launched in July 2001 under a strategic
5
alliance with Amazon.com. This strategic alliance agreement expires in
2010.
Under this alliance each company is responsible for specific aspects of
the on-line stores. Toysrus.com is responsible for merchandising and
content for the co-branded stores. Toysrus.com also identifies, buys,
owns and manages the inventory. Amazon.com handles web site
development, order fulfillment, customer service, and the housing of
Toysrus.com's inventory in Amazon.com's U.S. distribution centers. The
company recognizes revenue for Toysrus.com at the point in time when
merchandise is shipped to customers, in accordance with the shipping
terms (FOB shipping point) that exist under the agreement with
Amazon.com.
6. Cost of sales and selling, general and administrative expenses
The significant components of the line item "Cost of sales" include the
cost to acquire merchandise from vendors; freight in; markdowns at
cost; provision for inventory shortages; and discounts and allowances
related to merchandise inventories.
The significant components of the line item "Selling, general and
administrative expenses" include store payroll and related payroll
benefits; rent and other store operating expenses; net advertising
expenses; costs associated with operating the company's distribution
network that primarily relate to moving merchandise from distribution
centers to stores; and other corporate-related expenses.
7. Long-term debt and issuance of common stock
On May 28, 2002, the company completed its previously announced public
offerings of Toys "R" Us equity and equity-linked securities. On that
date, the company issued 14,950,000 shares of its common stock at a
price of $17.65 per share and received net proceeds of $253 million.
Also on that date, the company issued 8,050,000 equity security units
with a stated amount of $50 per unit and received net proceeds of $390
million. Each security unit consists of a contract to purchase, for
$50, a specified number of shares of Toys "R" Us common stock in August
2005, and a senior note due 2007 with a principal amount of $50. The
fair value of the contract to purchase shares of Toys "R" Us common
stock was estimated at $1.77 per equity security unit. The fair value
of the senior note was estimated at $48.23 per equity security unit.
Interest on the senior notes is payable quarterly at an initial rate of
6.25%, commencing August 2002. The notes are expected to be remarketed
in May 2005 at the then prevailing market interest rate for similar
notes. The proceeds allocated to the purchase contracts were recorded
in stockholders' equity on the condensed consolidated balance sheet.
The fair value of the senior notes is reflected as long-term debt on
the condensed consolidated balance sheet. The net proceeds from these
public offerings were used to refinance short-term borrowings and for
other general corporate purposes.
On March 19, 2002, the company refinanced a note payable originally due
in 2005 and increased the amount outstanding to $160 million from $100
million. This borrowing is repayable in semi-annual installments, with
the final installment due on February 20, 2008. The effective cost of
this borrowing is 2.23% and is secured by expected future cash flows
from license fees due from Toys - Japan.
8. Restructuring, non-recurring and other charges
In January 2002, the company recorded restructuring and other charges
of $237 million ($126 million net of taxes and after reversals from
1998 and 1995 restructuring charges) for the closing of 37 Kids "R" Us
store locations, 27 Toys "R" Us store locations, the consolidation of
five store support center facilities and the elimination of
approximately 1,900 staff positions at stores and headquarters. See the
company's annual report for the year ended February 2, 2002 for details
on these charges. The subsequent utilization and remaining reserve
balances are as follows:
6
(In millions) Reserve Balance Reserve Balance
Description @ 02/02/02 Utilized @ 08/03/02
- ------------------- ------------------ ----------- --------------------
Store Closings:
Lease commitments $52 $ 1 $ 51
Severance 4 - 4
Markdowns 27 16 11
Store Support Center Consolidation:
Lease commitments 28 - 28
Severance 15 9 6
- ------------------- ------------------ ----------- --------------------
Total remaining restructuring
and other charges $126 $ 26 $ 100
As of August 3, 2002, 21 of the Toys "R" Us store locations and 10 of
the Kids "R" Us store locations, identified as part of January 2002
restructuring and other charges, had closed. On August 11, 2002 an
additional 26 Kids "R" Us store locations were closed. The remaining
Toys "R" Us and Kids "R" Us store locations, identified as part of
January 2002 restructuring and other charges, will close by January
2003.
In 2000, the company's subsidiary Toysrus.com recorded $118 million in
non-recurring charges as a result of the transition to the co-branded
on-line store with Amazon.com. See the company's annual report for the
year ended February 2, 2002 and the company's form 10-Q for the quarter
ended May 4, 2002 for further descriptions of these charges. The
company had remaining lease commitment reserves of $3 million at
February 2, 2002 and August 3, 2002.
In 1998, the company recorded restructuring and other non-recurring
charges of $698 million ($508 million net of tax benefits) to
strategically reposition its worldwide business. See the company's
annual report for the year ended February 2, 2002 for details on these
charges. The company recorded $59 million of other charges as part of
this restructuring consisting of $35 million related to provisions for
legal settlements; $18 million for charges related to the write-off of
certain vendor and other receivables; and $6 million of miscellaneous
write-offs of other assets that were determined to have no realizable
value. The $59 million of other charges had been fully
utilized/reversed as of February 2, 2002. The subsequent utilization
and remaining reserve balances and are as follows:
(In millions) Reserve Balance Reserve Balance
Description @ 02/02/02 Utilized @ 08/03/02
- ----------------------- ----------------- ---------- ----------------
Closings/downsizings:
Lease commitments $25 $ 4 $ 21
Severance and other closing costs 6 2 4
- ----------------------- ---------------- ---------- ----------------
Total remaining restructuring charges $31 $ 6 $ 25
The company believes that unused reserves at August 3, 2002 are
reasonable estimates of what is required to complete all remaining
initiatives.
7
9. Segments
Information related to the various company segments is as follows:
- --------------------------------------------------------------------------------
(In millions)
13 Weeks Ended 26 Weeks Ended
-----------------------------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-----------------------------------------------------
Net sales
Toys "R" Us - U.S. $1,191 $ 1,226 $ 2,393 $ 2,453
Toys "R" Us - International 370 316 677 601
Babies "R" Us 384 341 797 711
Toysrus.com (1) 42 35 88 64
Kids "R" Us 83 103 210 253
- --------------------- -------- --------- ---------- ---------
Total $ 2,070 $ 2,021 $ 4,165 $ 4,082
- --------------------- -------- --------- ---------- ---------
Operating earnings / (loss)
Toys "R" Us - U.S. $ 24 $ 20 $ 49 $ 36
Toys "R" Us - International 4 - (10) (12)
Babies "R" Us 37 31 86 71
Toysrus.com, net of
minority interest (2) (14) (18) (28) (42)
Other (3) (48) (49) (72) (67)
--------- --------- ---------- ---------
Operating earnings / (loss) 3 (16) 25 (14)
Interest expense, net (30) (30) (58) (60)
- -------------------------------------------------------------------------------
Loss before income taxes $ (27) $ (46) $(33) $ (74)
- -------------------------------------------------------------------------------
(1) - Includes the sales of Toysrus.com - Japan.
(2) - Includes the operations of Toysrus.com - Japan, net of
minority interest.
(3) - Includes the operations of the Kids "R" US division, equity in net
earnings of Toys - Japan, and other corporate related
items.
10. Derivative Instruments and Hedging Activities
The company is exposed to market risk from potential changes in
interest rates and foreign exchange rates. The company continues to
regularly evaluate these risks and continues to take measures to
mitigate these risks, including, among other measures, entering into
derivative financial instruments to hedge a variety of risk exposures
including interest rate and currency risks. The company enters into
forward exchange contracts to minimize and manage the currency risks
related to its import merchandise purchase program. The company has
entered into interest rate swaps to manage interest rate risk and
strive to achieve what it believes is an acceptable balance between
fixed and variable rate debt.
The company has increased the carrying value of its long-term debt by
$76 million at August 3, 2002, representing the excess of the fair
value above the carrying amount of the debt at that date. Also at
August 3, 2002, the company has recorded derivative assets of $88
million and derivative liabilities of $36 million, representing the
fair value of these derivatives at that date. The derivative assets are
reflected on the condensed consolidated balance sheets as part of
"Other assets." The derivative liabilities are reflected on the
condensed consolidated balance sheets as part of "Other liabilities."
8
The company did not realize any material gain or loss related to these
transactions for any of the periods presented. Accordingly, non-cash
increases in other operating assets and long-term debt of $46 million,
and $160 million, respectively, and a decrease in other operating
liabilities of $86 million have been excluded from the consolidated
statement of cash flows for the six months ended August 3, 2002.
11. Allowances and credits received from vendors
Credits and allowances are received from vendors and are related to
formal agreements negotiated with such vendors. These credits and
allowances are predominately for cooperative advertising, promotions,
and volume related purchases. These credits and allowances, excluding
advertising allowances, are netted against cost of sales. The company's
policy is to recognize credits, which are related directly to inventory
purchases, as the related inventory is sold. Cooperative advertising
allowances offset the cost of cooperative advertising that is agreed to
by the company and its vendors. These cooperative advertising
allowances are netted against advertising expenses included in selling,
general and administrative expenses. The company's policy is to
recognize cooperative advertising allowances in the period that the
related advertising media is run.
12. Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
which addresses the recognition, measurement, and reporting of costs
associated with exit or disposal activities and supercedes Emerging
Issues Task Force issue ("EITF") No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS No. 146 and EITF No. 94-3 is the
requirement that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather
than at the date an entity commits to an exit plan. A fundamental
conclusion of SFAS No. 146 is that an entity's commitment to a plan, by
itself, does not create an obligation that meets the definition of
liability. SFAS No. 146 also establishes that the initial measurement
of a liability be based on fair value. The provisions of this statement
are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The company does
not believe that adoption of this pronouncement will have a significant
effect on the company's consolidated financial condition, results of
operations and cash flow.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The company adopted SFAS No. 144
as of February 3, 2002 and the adoption did not have a significant
effect on the company's consolidated financial condition, results of
operations and cash flow.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 changes
the accounting for goodwill from an amortization method to an
impairment only approach. The company adopted this pronouncement on
February 3, 2002. As a result of this adoption, $348 million of
goodwill, which was to be amortized ratably through 2037, ceased. Based
on the historical and projected operating results of the reporting
units to which the goodwill relates, the company has determined that no
impairment of this goodwill exists. Application of the non-amortization
9
provisions of SFAS No. 142 resulted in a diminution of net loss of $2
million and $4 million for the quarter ended August 3, 2002 and the 26
weeks ended August 3, 2002, respectively. Had the non-amortization
provisions of SFAS No. 142 been applied for the quarter ended and the
26 weeks ended August 4, 2001, the company would have reported an
adjusted net loss of ($27) million and ($43) million, respectively, and
a basic and diluted loss per share of ($0.14) and ($0.22),
respectively.
13. Unsecured committed revolving credit facilities
As of August 3, 2002, the company had $975 million in unsecured
committed revolving credit facilities, all of which were available.
These credit facilities consisted of a $650 million facility expiring
September 2006 and a $325 million facility expiring September 2002. On
August 26, 2002, the company restructured and renewed the unsecured
committed revolving credit facilities. As of this date, the company has
$985 million in unsecured committed revolving credit facilities from a
syndicate of financial institutions. These credit facilities consist of
a $685 million facility expiring September 2006 and a $300 million
facility expiring on August 25, 2003. The facilities are available for
seasonal borrowings and to support the company's domestic commercial
paper borrowings.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
Results of Operations
Comparison of second quarter (13 weeks) ended August 3, 2002 to second quarter
(13 weeks) ended August 4, 2001 and comparison of six months (26 weeks) ended
August 3, 2002 to six months (26 weeks) ended August 4, 2001
Net sales increased 2% in U.S. dollars to $2.1 billion for the second quarter of
2002. Foreign currency exchange had a favorable impact on net sales for the
second quarter of 2002. Excluding the impact of currency translation net sales
increased 1% for the second quarter of 2002. For the first six months of 2002,
our net sales also increased 2% to $4.2 billion. Foreign currency had no impact
on the calculation of sales percentage increase for the first six-month period.
Total enterprise sales include sales by all stores, whether operated by the
company, under license agreements, or by franchisees. Total enterprise sales
were $2.4 billion and $2.3 billion for the quarters ended August 3, 2002 and
August 4, 2001, respectively, and $4.8 billion for each of the six-month periods
ended August 3, 2002 and August 4, 2001.
Our total consolidated comparable store sales, in local currencies, were flat
for the second quarter of 2002 and for the first six months of 2002. Comparable
store sales for the Toys "R" Us - U.S. division decreased 3% for the second
quarter of 2002 and for the first six months of 2002. Several factors
contributed to the comparable store sales decline at Toys "R" Us - U.S.,
including the disruption caused by the renovation of stores to the Mission
Possible format; a total of 142 stores were in the process of renovation during
the second quarter of this year. Sales of seasonal products, such as pools,
sandboxes and swingsets, decreased 9%. This decrease was primarily due to less
than ideal weather patterns and our decision to defer advertising and cancel
certain product orders in order to lower seasonal inventories and to focus the
division's resources on the critical holiday selling period in the third and
fourth quarters. Video gaming sales decreased 6% in the second quarter,
primarily due to price deflation that was not completely offset with increases
in the number of units sold. In addition, the prior year second quarter had a
notable video gaming sales spike due to the introduction of Gameboy Advance.
International comparable toy store sales, on a local currency basis, increased
9% for the second quarter of 2002 and for the six-month period. This increase
was primarily driven by our toy stores in the United Kingdom, Spain and
Australia, all of which reported double-digit comparable store sales gains for
the second quarter and six-month period of 2002. The International division
continues to place an emphasis on improving merchandise content through the
addition of in-store shops such as Universe of Imagination (learning and
educational products), Animal Alley (plush), and Babies "R" Us (newborn and
infant products). In addition, the International division continues to emphasize
exclusive products; sales of exclusive products account for a significant
portion of total International sales. International is also implementing many of
the initiatives underway in our Toys "R" Us - U.S. division, including
improvements in presentation and customer service. Our Babies "R" Us division
had a 3% comparable store sales increase and total sales increase of 12% for
both the second quarter and first six months of this year. We opened four new
Babies "R" Us stores during the quarter and nine during the first six months of
2002. The Kids "R" Us division reported a 12% comparable stores sales decline
for both the second quarter and the six-month period, primarily due to the same
weather trends that adversely impacted the seasonal business at Toys "R" Us -
U.S. Toysrus.com reported net sales of $42 million and $88 million for the
second quarter and the first six months of 2002, respectively, up from $35
million and $64 million, respectively.
11
Consolidated gross margin, as a percentage of sales, declined 30 basis points to
32.4% for the second quarter of 2002, primarily as a result of an increase in
markdowns directly related to our initiative to optimize inventory levels during
the second half of 2002. Consolidated gross margin remained flat at 32.5% on a
year-to-date basis, with the positive impact of a more favorable sales mix
offset by higher net markdowns. Gross margin for the Toys "R" Us - US division
decreased 100 basis points to 31.2% for the second quarter and also decreased 30
basis points to 31.3% on a year to date basis, reflecting the margin drivers
discussed above. Gross margin for the International division decreased 10 basis
points to 33.7% and 33.2% for both the second quarter and the six-month period,
respectively. Gross margin at our Babies "R" Us division grew 50 basis points to
34.6% for the second quarter and 60 basis points to 34.8% for the first six
months of 2002, reflecting a shift in sales mix to higher margin import
products.
Total SG&A, as a percentage of sales, decreased 140 basis points to 28.5% for
the second quarter of 2002, primarily due to our continued focus on expense
control management. The primary drivers of this decrease was a reduction of
store payroll and related costs of 60 basis points, a decrease in distribution
costs of 40 basis points, and a decrease in net advertising costs of 40 basis
points. On a year to date basis, our consolidated SG&A decreased 120 basis
points to 28.1%, due in part to a decrease in store payroll and related costs of
50 basis points, a decrease in distribution costs of 50 basis points, as well as
a decrease in net advertising costs of 30 basis points. SG&A for Toys "R" Us -
U.S., decreased 210 basis points to 25.6% for the second quarter and also
decreased 160 basis points to 25.6% on a year to date basis. SG&A for the
International division decreased 100 basis points to 29.5% for the second
quarter and decreased 50 basis points to 31.3% for six months ended August 3,
2002. These decreases were primarily a function of comparable expense structures
coupled with higher sales productivity in the International markets. SG&A for
the Babies "R" Us division decreased 30 basis points to 23.4% for the second
quarter 2002 and decreased 50 basis points to 22.5% on a year to date basis.
Net interest expense was unchanged at $30 million for the second quarter and
decreased $2 million for the first six months of 2002. The respective favorable
trends in net interest expense, despite the increase in debt levels, are mainly
attributable to the favorable interest rate environment.
Foreign currency exchange did not have a significant impact on net earnings for
either the second quarter or first six months of 2002.
Restructuring, Non-recurring and Other Charges
In the fourth quarter of 2001, we recorded restructuring and other charges
relating to our plans announced on January 28, 2002 to close 37 Kids "R" Us
stores and 27 Toys "R" Us stores, eliminate approximately 1,900 staff positions
at stores and headquarters, and consolidate our store support center facilities
into our new headquarters in Wayne, New Jersey. We also reversed $24 million of
previously accrued charges ($11 million from the 1998 program and $13 million
from the 1995 program) that have been deemed no longer needed. These
restructuring and other charges totaled $213 million on a pre-tax basis.
Accordingly, based on all of these actions, we recorded $126 million, on an
after-tax basis, of restructuring and other charges in the fourth quarter of our
fiscal year ended February 2, 2002. Details on the components of our
restructuring and other charges announced January 28, 2002 are described in our
annual report for the year ended February 2, 2002.
12
The subsequent utilization and remaining reserve balances are as follows:
(In millions) Reserve Balance Reserve Balance
Description @ 02/02/02 Utilized @ 08/03/02
- --------------------------------------------------------------------------------
Store Closings:
Lease commitments $ 52 $ 1 $ 51
Severance 4 - 4
Markdowns 27 16 11
Store Support Center Consolidation:
Lease commitments 28 - 28
Severance 15 9 6
- --------------------------------------------------------------------------------
Total remaining restructuring
and other charges $126 $ 26 $ 100
As of August 3, 2002, 21 of the Toys "R" Us store locations and 10 of the Kids
"R" Us store locations, identified as part of January 2002 restructuring and
other charges, had closed. On August 11, 2002 an additional 26 Kids "R" Us store
locations also closed. The remaining Toys "R" Us and Kids "R" Us store
locations, identified as part of January 2002 restructuring and other charges,
will close by January 2003.
In 2000, our Toysrus.com subsidiary recorded non-recurring costs and charges
totaling, before minority interest, approximately $118 million, $10 million of
which were included in cost of sales and $108 million of which were included in
selling, general and administrative expenses. These costs and charges were
related to the closure of three distribution centers, the write-off of web site
assets, as well as other costs associated with migrating data and merchandise to
the new co-branded site with Amazon.com. See our annual report for the year
ended February 2, 2002 and our form 10-Q for the quarter ended May 4, 2002 for
further descriptions of these charges. The company had remaining lease
commitment reserves of $3 million at February 2, 2002 and August 3, 2002.
During 1998, we announced strategic initiatives to reposition our worldwide
business and other charges including some reformatting of our U.S. toy stores,
as well as the restructuring of our International operations, which resulted in
a charge of $353 million ($279 million net of tax benefits). Details on certain
components of our strategic initiatives and other charges are described in our
annual report for the year ended February 2, 2002. We recorded $59 million of
other charges as part of this restructuring consisting of $35 million related to
provisions for legal settlements; $18 million for charges related to the
write-off of certain vendor and other receivables; and $6 million of
miscellaneous write-offs of other assets that were determined to have no
realizable value. The $59 million of other charges had been fully
utilized/reversed as of February 2, 2002. The subsequent utilization and
remaining reserve balances and are as follows:
(In millions) Reserve Balance Reserve Balance
Description @ 02/02/02 Utilized @ 08/03/02
- --------------------------------------------------------------------------------
Closings/downsizings:
Lease commitments $25 $ 4 $ 21
Severance and other closing costs 6 2 4
- --------------------------------------------------------------------------------
Total remaining restructuring charges $31 $ 6 $ 25
We believe that unused reserves remaining at August 3, 2002 are reasonable
estimates of what is required to complete all remaining initiatives.
13
Financial Condition
By February 1, 2003, we expect to be operating approximately 1,589 stores,
consisting of: 685 toy stores in the United States, substantially all of which
will be in the Mission Possible format; 536 International toy stores (including
112 licensee and franchise stores); 147 Kids "R" Us stores; 185 Babies "R" Us
stores and 36 Imaginarium stores. In addition, Toysrus.com will sell merchandise
through Internet sites at www.toysrus.com, www.babiesrus.com and
www.imaginarium.com.
We have $985 million in unsecured committed revolving credit facilities from a
syndicate of financial institutions. These credit facilities consist of a $685
million facility expiring September 2006 and a $300 million facility expiring on
August 25, 2003. As of August 3, 2002, we had $975 million in unsecured
committed revolving credit facilities, all of which were available. The
facilities are available for seasonal borrowings and to support the company's
domestic commercial paper borrowings. Cash requirements for operations and
investing activities will be met primarily through operating activities,
issuance of commercial paper and utilization of our unsecured committed
revolving credit facilities.
For 2002, capital requirements for our expansion plans mentioned above, as well
as other capital requirements are estimated to be approximately $475 million.
Our net cash outflows from operations were reduced to $379 million for the first
six months of 2002 compared with $480 million for the first six months of 2001,
primarily due to the decrease in funds expended on accounts payables and other
operating liabilities, partially offset by an increase in cash outflows for
merchandise inventories.
Net borrowings decreased to $511 million for the six months ended August 3,
2002, as compared with net borrowings of $734 million for the six months ended
August 4, 2001. This decrease is primarily due to the repayment of short-term
debt with the proceeds of equity and equity linked securities as described
below. On May 28, 2002, Standard & Poor's revised our long-term debt rating to
"BBB" and affirmed our commercial paper rating of "A-2" with a stable outlook.
Moody's currently rates our long-term debt and commercial paper "Baa3/P-3". We
continue to be confident in our ability to refinance maturing debt, as well as
to provide for new capital.
We did not purchase any shares through our share repurchase program during the
second quarters of 2002 or 2001.
We are exposed to market risk from potential changes in interest rates and
foreign exchange rates. Our market risks at August 3, 2002 are similar to those
disclosed in our Form 10-K for the year ended February 2, 2002 and we continue
to regularly evaluate these risks and continue to take measures to mitigate
these risks, including, among other measures, entering into derivative financial
instruments to hedge a variety of risk exposures including interest rate and
currency risks.
On May 28, 2002, we completed our previously announced public offerings of Toys
"R" Us equity and equity-linked securities. On that date, we issued 14,950,000
shares of our common stock at a price of $17.65 per share and received net
proceeds of $253 million. Also on that date, we issued 8,050,000 equity security
units with a stated amount of $50 per unit and received net proceeds of $390
million. Each security unit consists of a contract to purchase, for $50, a
specified number of shares of Toys "R" Us common stock in August 2005, and a
senior note due 2007 with a principal amount of $50. The fair value of the
contract to purchase shares of Toys "R" Us common stock was estimated at $1.77
per equity security unit. The fair value of the senior note was estimated at
$48.23 per equity security unit. Interest on the senior notes is payable
quarterly at an initial rate of 6.25%. The notes are expected to be remarketed
in May 2005 at the then prevailing market interest rate for similar notes. The
net proceeds from these public offerings were used to refinance short-term
borrowings and for other general corporate purposes.
14
Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" which
addresses the recognition, measurement, and reporting of costs associated with
exit or disposal activities and supercedes Emerging Issues Task Force issue
("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The principal difference between SFAS No. 146 and EITF No.
94-3 is the requirement that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the date an entity commits to an exit plan. A fundamental conclusion of SFAS No.
146 is that an entity's commitment to a plan, by itself, does not create an
obligation that meets the definition of liability. SFAS No. 146 also establishes
that the initial measurement of a liability recognized be based on fair value.
The provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
We do not believe that the adoption of this pronouncement will have a
significant effect on our consolidated financial condition, results of
operations and cash flow.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". We adopted SFAS
No. 144 as of February 3, 2002 and the adoption did not have a significant
effect on our consolidated financial condition, results of operations and cash
flow.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. We adopted
this pronouncement on February 3, 2002. As a result of this adoption, $348
million of goodwill, which was to be amortized ratably through 2037, ceased.
Based on the historical and projected operating results of the reporting units
to which the goodwill relates, we have determined that no impairment of this
goodwill exists. Application of the non-amortization provisions of SFAS No. 142
resulted in a diminution of net loss of $2 million and $4 million for the
quarter ended August 3, 2002 and the 26 weeks ended August 3, 2002,
respectively. Had the non-amortization provisions of SFAS No. 142 been applied
for the quarter ended and the six months ended August 4, 2001, we would have
reported an adjusted net loss of ($27) million and ($43) million, respectively,
and a basic and diluted loss per share of ($0.14) and ($0.22), respectively.
- --------------------------------------------------------------------------------
On February 12, 2002, Roger N. Farah, one of our directors, purchased 1,000
shares of our common stock. Mr. Farah has filed a Form 4 in respect of this
transaction, although it was not filed in a timely manner. With this exception,
we believe that all persons who are subject to Section 16(a) of the Securities
Exchange Act of 1934 have complied with the requirements thereof during the
current fiscal year.
15
Forward-Looking Statements
This Form 10-Q contains "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. We may also make forward-looking statements in
other documents filed with the Securities and Exchange Commission, our annual
report to shareholders, our proxy statement and in press releases. All
statements that are not historical facts, including statements about our beliefs
or expectations, are forward-looking statements. Such statements involve risks
and uncertainties that exist in our operations and business environment that
could render actual outcomes and results materially different than predicted.
Our forward-looking statements are based on assumptions about many factors,
including, but not limited to, ongoing competitive pressures in the retail
industry, changes in consumer spending, general economic conditions in the
United States and other jurisdictions in which we conduct business (such as
interest rates and consumer confidence) and normal business uncertainty. While
we believe that our assumptions are reasonable at the time forward-looking
statements were made, we caution that it is impossible to predict the actual
outcome of numerous factors and, therefore, readers should not place undue
reliance on such statements. Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update such statements in
light of new information or future events that involve inherent risks and
uncertainties. Actual results may differ materially from those contained in any
forward- looking statement.
16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting on June 5, 2002, a total of 197,312,349
shares of common stock were entitled to vote at the meeting.
The number of shares entitled to vote at our Annual Meeting
represents stockholders who owned stock at the close of
business on the record date of April 10, 2002.
Below are the following numbers of shares of common stock
entitled to vote that were present in person or represented by
proxy at the meeting:
In person: 181,771,843
By proxy: 0
Total: 181,771,843
All nominees for director were elected to a one-year term.
The following table sets forth the vote of the shareholders
with respect to the election of directors.
Votes For Votes Withheld
RoAnn Costin 177,214,962 4,556,881
John H. Eyler, Jr. 178,851,995 2,919,848
Roger N. Farah 178,851,364 2,920,479
Peter A. Georgescu 178,851,872 2,919,971
Michael Goldstein 177,841,408 3,930,435
Calvin Hill 178,851,564 2,920,279
Nancy Karch 177,738,209 4,033,634
Charles Lazarus 178,849,180 2,922,663
Norman S. Matthews 178,851,568 2,920,275
Arthur B. Newman 177,739,242 4,032,601
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed no Current Report on Form 8-K during the quarter
ended August 3, 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: September 12, 2002 Toys "R" Us, Inc.
-----------------------------------
(Registrant)
/s/ Louis Lipschitz
------------------------------------
Louis Lipschitz
Executive Vice President and
Chief Financial Officer
18
CERTIFICATIONS
Each of the undersigned, in his capacity as an officer of
Toys "R" Us, Inc., provides the following certifications required by 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, and 17 C.F.R.ss.240.13a-14.
I, John H. Eyler, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toys "R" Us, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
Date: September 12, 2002
/s/ John H. Eyler, Jr.
----------------------
John H. Eyler, Jr.
Chief Executive Officer
- -------------------------------------------------------------------------------
I, Louis Lipschitz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toys "R" Us, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
Date: September 12, 2002
/s/ Louis Lipschitz
----------------------
Louis Lipschitz
Executive Vice President
- Chief Financial Officer
19