TOYS R US INC - FORM 8-K - EX-99.1 - TOYS-DELAWARE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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Exhibit 99.1

TOYS “R” US – DELAWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 2015

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



		PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Operations		2
Condensed Consolidated Statements of Comprehensive Loss		3
Condensed Consolidated Statements of Cash Flows		4
Condensed Consolidated Statements of Stockholder’s Deficit		5
Notes to the Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19


Item 1.	Financial Statements

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(In millions)	August 1, 2015			January 31, 2015			August 2, 2014
ASSETS
Current Assets:
Cash and cash equivalents	$	151		$	121		$	136
Accounts and other receivables	106			106			113
Merchandise inventories	1,562			1,495			1,611
Current deferred tax assets	28			34			26
Prepaid expenses and other current assets	74			65			90
Total current assets	1,921			1,821			1,976
Property and equipment, net	1,706			1,773			1,815
Deferred tax assets	28			28			35
Due from affiliates, net	874			835			798
Other assets	88			99			97
Total Assets	$	4,617		$	4,556		$	4,721

LIABILITIES AND STOCKHOLDER’S DEFICIT
Current Liabilities:
Accounts payable	$	866		$	974		$	814
Short-term borrowings from Parent	356			376			398
Accrued expenses and other current liabilities	582			639			599
Income taxes payable	104			102			99
Current portion of long-term debt	25			22			20
Total current liabilities	1,933			2,113			1,930
Long-term debt	2,763			2,383			2,735
Deferred tax liabilities	301			307			275
Deferred rent liabilities	376			377			384
Other non-current liabilities	133			128			130
Total stockholder’s deficit	(889		)	(752		)	(733		)
Total Liabilities and Stockholder’s Deficit	$	4,617		$	4,556		$	4,721

See Notes to the Condensed Consolidated Financial Statements.

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Net sales	$	1,571		$	1,628		$	3,214		$	3,331
Other revenues (1)	22			22			40			43
Total revenues	1,593			1,650			3,254			3,374
Cost of sales	997			1,051			2,048			2,143
Cost of other revenues	2			3			3			4
Gross margin	594			596			1,203			1,227
Selling, general and administrative expenses (1)	575			620			1,188			1,277
Depreciation and amortization	58			64			115			137
Other income, net (1)	(24		)	(21		)	(55		)	(39		)
Total operating expenses	609			663			1,248			1,375
Operating loss	(15		)	(67		)	(45		)	(148		)
Interest expense (1)	(64		)	(58		)	(134		)	(118		)
Interest income (1)	25			18			48			35
Loss before income taxes	(54		)	(107		)	(131		)	(231		)
Income tax expense	3			9			4			9
Net loss	$	(57	)	$	(116	)	$	(135	)	$	(240	)

(1) Includes the following income (expenses) resulting from transactions with related parties (see Note 8 entitled “Related party transactions” for further details):
	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Other revenues	$	13		$	16		$	26		$	31
Selling, general and administrative expenses	(75		)	(78		)	(155		)	(158		)
Other income, net	8			7			18			14
Interest expense	(6		)	(5		)	(11		)	(10		)
Interest income	25			18			48			35

See Notes to the Condensed Consolidated Financial Statements.

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Net loss	$	(57	)	$	(116	)	$	(135	)	$	(240	)
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments	(10		)	—			(4		)	5
Unrealized gain on hedged transactions	—			1			—			1
Total other comprehensive (loss) income, net of tax	(10		)	1			(4		)	6
Comprehensive loss, net of tax	$	(67	)	$	(115	)	$	(139	)	$	(234	)

See Notes to the Condensed Consolidated Financial Statements.

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014
Cash Flows from Operating Activities:
Net loss	$	(135	)	$	(240	)
Adjustments to reconcile Net loss to Net cash used in operating activities:
Depreciation and amortization	115			137
Amortization and write-off of debt issuance costs and debt discount	12			13
Deferred income taxes	1			1
Unrealized losses on foreign exchange	3			—
Other	7			14
Changes in operating assets and liabilities:
Accounts and other receivables	—			(2		)
Merchandise inventories	(71		)	(76		)
Prepaid expenses and other operating assets	(4		)	(26		)
Due from affiliates, net	(39		)	(21		)
Accounts payable, Accrued expenses and other liabilities	(146		)	(168		)
Income taxes payable and receivable	1			(11		)
Net cash used in operating activities	(256		)	(379		)
Cash Flows from Investing Activities:
Capital expenditures	(59		)	(54		)
Proceeds from sales of fixed assets	1			2
Net cash used in investing activities	(58		)	(52		)
Cash Flows from Financing Activities:
Long-term debt borrowings	459			343
Long-term debt repayments	(95		)	(102		)
Short-term borrowings from Parent	801			891
Repayments of short-term borrowings to Parent	(821		)	(809		)
Capitalized debt issuance costs	—			(12		)
Net cash provided by financing activities	344			311
Effect of exchange rate changes on Cash and cash equivalents	—			1
Cash and cash equivalents:
Net increase (decrease) during period	30			(119		)
Cash and cash equivalents at beginning of period	121			255
Cash and cash equivalents at end of period	$	151		$	136

See Notes to the Condensed Consolidated Financial Statements.

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT

(Unaudited)



	Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholder’s Deficit
(In millions)	Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholder’s Deficit
Balance, February 1, 2014	$	3,518	$	(43	)	$	(4,002	)	$	(527	)
Net loss	—		—			(240		)	(240		)
Total other comprehensive income, net of tax	—		6			—			6
Stock compensation expense	3		—			—			3
Contribution arising from tax allocation arrangement	6		—			—			6
Non-cash contributions from Parent	19		—			—			19
Balance, August 2, 2014	$	3,546	$	(37	)	$	(4,242	)	$	(733	)

Balance, January 31, 2015	$	3,533	$	(57	)	$	(4,228	)	$	(752	)
Net loss	—		—			(135		)	(135		)
Total other comprehensive loss, net of tax	—		(4		)	—			(4		)
Stock compensation expense	2		—			—			2
Balance, August 1, 2015	$	3,535	$	(61	)	$	(4,363	)	$	(889	)

See Notes to the Condensed Consolidated Financial Statements.

TOYS “R” US - DELAWARE, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of presentation

Toys “R” Us – Delaware, Inc. (the “Company,” “we,” “us,” or “our”), a Delaware corporation, is a wholly-owned subsidiary of Toys “R” Us, Inc. (“Parent”), which owns and licenses Toys “R” Us and Babies “R” Us stores in the United States and foreign countries and jurisdictions. We operate Toys “R” Us stores in the United States, Canada, Guam and Puerto Rico; Babies “R” Us stores in the United States; and Internet businesses in the United States and Canada.

The Condensed Consolidated Balance Sheets as of August 1, 2015, January 31, 2015 and August 2, 2014, the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Loss for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014 and the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholder’s Deficit for the twenty-six weeks ended August 1, 2015 and August 2, 2014, have been prepared by us in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting. Our interim Condensed Consolidated Financial Statements are unaudited and are subject to year-end adjustments. In the opinion of management, the financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six weeks then ended. The Condensed Consolidated Balance Sheet at January 31, 2015, presented herein, has been derived from our audited balance sheet included in our Annual Financial Statements for the fiscal year ended January 31, 2015, but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Financial Statements for the fiscal year ended January 31, 2015 included as an exhibit to Parent’s Form 8-K filed on April 24, 2015. The results of operations for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014 are not necessarily indicative of operating results for the full year.

Subsequent Events

We have performed an evaluation of subsequent events through September 15, 2015, the date these financial statements were issued. Subsequent events, if any, have been disclosed in the related footnotes.

2. Long-term debt

A summary of the Company’s consolidated Long-term debt as of August 1, 2015, January 31, 2015 and August 2, 2014 is outlined in the table below:



(In millions)	August 1, 2015		January 31, 2015		August 2, 2014
Secured term loan facility, due fiscal 2016	$	—	$	—	$	643
7.375% senior secured notes, due fiscal 2016	—		—		355
8.500% senior secured notes, due fiscal 2017 (1)	721		721		720
Incremental secured term loan facility, due fiscal 2018	131		133		371
Second incremental secured term loan facility, due fiscal 2018	66		67		209
$1.85 billion secured revolving credit facility, expires fiscal 2019	377		—		250
Tranche A-1 loan facility, due fiscal 2019	273		272		—
Secured term B-4 loan facility, due fiscal 2020	1,006		1,010		—
8.750% debentures, due fiscal 2021 (2)	22		22		22
Finance obligations associated with capital projects	169		169		170
Capital lease obligations	23		11		15
	2,788		2,405		2,755
Less: current portion	25		22		20
Total Long-term debt (3)	$	2,763	$	2,383	$	2,735


(1)	Represents obligations of Toys “R” Us Property Company II, LLC, our indirect wholly-owned subsidiary.


(2)	Our Parent is co-obligor of the outstanding debentures due fiscal 2021. However, all future principal and interest will be funded through the operating cash flows of the Company.

(3)

We maintained derivative instruments on certain of our long-term debt, which impacts our effective interest rates. Refer to Note 3 entitled “Derivative instruments and hedging activities” for further details. In addition, intercompany loans with our Parent and its other subsidiaries are not included within our long-term debt balances. Refer to Note 8 entitled “Related party transactions” for further details.

Our credit facilities, loan agreements and indentures contain customary covenants that, among other things, restrict our and our subsidiaries’ ability to:


•	incur certain additional indebtedness;


•	transfer money between our Parent, us and our various subsidiaries;


•	pay dividends on, repurchase or make distributions with respect to our or our subsidiaries’ capital stock or make other restricted payments;


•	issue stock of subsidiaries;


•	make certain investments, loans or advances;


•	transfer and sell certain assets;


•	create or permit liens on assets;


•	consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;


•	enter into certain transactions with our affiliates; and


•	amend certain documents.

As of August 1, 2015, we did not have any net assets subject to such restrictions. Our agreements also contain various and customary events of default with respect to the indebtedness, including, without limitation, the failure to pay interest or principal when the same is due under the agreements, cross default and cross acceleration provisions, the failure of representations and warranties contained in the agreements to be true and certain insolvency events. If an event of default occurs and is continuing, the principal amounts outstanding thereunder, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable by the lenders.

We are dependent on the borrowings provided by the lenders to support our working capital needs, capital expenditures and to service debt. As of August 1, 2015, we have funds available to finance our operations under our $1.85 billion secured revolving facility (“ABL Facility”) through March 2019, subject to an earlier springing maturity.

Borrowing Availability

Under our ABL Facility which expires on March 21, 2019 subject to an earlier springing maturity, we had outstanding borrowings of $377 million, a total of $96 million of outstanding letters of credit and excess availability of $622 million as of August 1, 2015. We are also subject to a minimum excess availability covenant of $125 million, with remaining availability of $497 million in excess of the covenant at August 1, 2015.

3. Derivative instruments and hedging activities

We are exposed to market risk from potential changes in interest rates and foreign currency exchange rates. We regularly evaluate our exposure and enter into derivative financial instruments to economically manage these risks. We record all derivatives as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value and we do not offset assets and liabilities with the same counterparty. We recognize the changes in fair value as unrealized gains and losses. The recognition of these gains or losses depends on our intended use of the derivatives and the resulting designation. In certain defined conditions, we may designate a derivative as a hedge for a particular exposure.

Interest Rate Contracts

We and our subsidiaries have a variety of fixed and variable rate debt instruments and are exposed to market risks resulting from interest rate fluctuations. We enter into interest rate swaps and/or caps to reduce our exposure to variability in expected future cash outflows and changes in the fair value of certain Long-term debt attributable to the changes in London Interbank Offered Rate (“LIBOR”). Some of our interest rate contracts contain credit-risk related contingent features and are subject to master netting arrangements. As of August 1, 2015, we did not have any outstanding interest rate contracts. A portion of our interest rate swaps and caps as of August 2, 2014 were designated as cash flow hedges in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging.”

The hedge accounting for a designated cash flow hedge requires that the effective portion be recorded to Accumulated other comprehensive loss; the ineffective portion of a cash flow hedge is recorded to Interest expense. We evaluate the effectiveness of our cash flow hedging relationships on an ongoing basis. For our derivatives that were designated as cash flow hedges, no

material ineffectiveness was recorded for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, respectively. Reclassifications from Accumulated other comprehensive loss to Interest expense primarily related to realized Interest expense on interest rate caps.

Certain of our agreements with credit-risk related contingent features contain cross-default provisions which provide that we could be declared in default on our derivative obligations if we default on certain specified indebtedness. At August 1, 2015, January 31, 2015 and August 2, 2014, there were no derivative liabilities related to agreements that contain credit-risk related contingent features. As of August 1, 2015, January 31, 2015 and August 2, 2014, we were not required to post collateral for any of these derivatives.

Foreign Exchange Contracts

We enter into foreign currency forward contracts to economically hedge the USD merchandise purchases of our Canadian subsidiary and our short-term, cross-currency intercompany loans with our subsidiaries. We enter into these contracts in order to reduce our exposure to the variability in expected cash outflows attributable to changes in foreign currency rates. These derivative contracts are not designated as hedges and are recorded on our Condensed Consolidated Balance Sheets at fair value with a gain or loss recorded on the Condensed Consolidated Statements of Operations in Interest expense.

Our foreign exchange contracts typically mature within 12 months. Some of these contracts contain credit-risk related contingent features and are subject to master netting arrangements. Some of these agreements contain provisions which provide that we could be declared in default on our derivative obligations if we default on certain specified indebtedness. At August 1, 2015 and January 31, 2015, there were no derivative liabilities related to agreements that contain credit-risk related contingent features. At August 2, 2014, derivative liabilities related to agreements that contain credit-risk related contingent features were less than $1 million. As of August 1, 2015, January 31, 2015 and August 2, 2014, we were not required to post collateral for any of these derivatives.

The following table sets forth the net impact of the effective portion of derivatives designated as cash flow hedges on Accumulated other comprehensive loss on our Condensed Consolidated Statements of Stockholder’s Deficit for the twenty-six weeks ended August 1, 2015 and August 2, 2014:



	26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014
Derivatives designated as cash flow hedges:
Beginning balance	$	1		$	(1	)
Change in fair value recognized in Accumulated other comprehensive loss - Interest Rate Contracts	—			—
Reclassifications from Accumulated other comprehensive loss - Interest Rate Contracts	(1		)	1
Ending balance	$	—		$	—

The following table sets forth the impact of derivatives on Interest expense on our Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014:



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Derivatives not designated for hedge accounting:
Loss on the change in fair value - Interest Rate Contract	$	—		$	(1	)	$	—		$	(1	)
Loss on the change in fair value - Merchandise Purchases Program Foreign Exchange Contracts	(5		)	(1		)	(4		)	(1		)
	(5		)	(2		)	(4		)	(2		)

Derivatives designated as cash flow hedges:
Amortization of hedged caps	—			(1		)	—			(1		)
	—			(1		)	—			(1		)

Derivative designated as a fair value hedge:
Loss on the change in fair value - Interest Rate Contract	—			—			—			(2		)
Gain recognized in Interest expense on hedged item	—			—			—			2
	—			—			—			—
Total Interest expense	$	(5	)	$	(3	)	$	(4	)	$	(3	)

The following table contains the notional amounts and related fair values of our derivatives included within our Condensed Consolidated Balance Sheets as of August 1, 2015, January 31, 2015 and August 2, 2014:



	August 1, 2015				January 31, 2015				August 2, 2014
(In millions)	Notional Amount		Fair Value Assets/ (Liabilities)		Notional Amount		Fair Value Assets/ (Liabilities)		Notional Amount		Fair Value Assets/ (Liabilities)
Interest Rate Contracts designated as cash flow hedges:
Prepaid expenses and other current assets (1)	$	—	$	—	$	700	$	—	$	700	$	—
Interest Rate Contract not designated for hedge accounting:
Prepaid expenses and other current assets (1)	—		—		300		—		300		—
Other assets	—		—		—		—		350		9
Foreign Currency Contracts not designated for hedge accounting:
Prepaid expenses and other current assets	61		4		—		—		38		—
Accrued expenses and other current liabilities	$	—	$	—	$	—	$	—	$	20	$	—
Total derivative contracts outstanding:
Prepaid expenses and other current assets	$	61	$	4	$	1,000	$	—	$	1,038	$	—
Other assets	—		—		—		—		350		9
Total derivative assets (2)	$	61	$	4	$	1,000	$	—	$	1,388	$	9

Accrued expenses and other current liabilities	$	—	$	—	$	—	$	—	$	20	$	—
Total derivative liabilities (2)	$	—	$	—	$	—	$	—	$	20	$	—


(1)	In April 2015, two interest rate caps matured.


(2)	Refer to Note 4 entitled “Fair value measurements” for the fair value of our derivative instruments classified within the fair value hierarchy.

Offsetting of Derivatives

We present our derivatives at gross fair values in the Condensed Consolidated Balance Sheets. However, some of our interest rate and foreign exchange contracts are subject to master netting arrangements which allow net settlements under certain

conditions. As of August 1, 2015 and January 31, 2015 we did not have any derivative liabilities which could be net settled against our derivative assets, respectively. As of August 2, 2014 the aggregate gross fair value of derivative liabilities which could be net settled against our derivative assets were nominal. As of August 1, 2015 the aggregate gross fair value of derivative assets which could be net settled against our derivative liabilities were less than $1 million. As of January 31, 2015, we did not have any derivative assets which could be net settled against our derivative liabilities. As of August 2, 2014 the aggregate gross fair value of derivative assets which could be net settled against our derivative liabilities were nominal. As of August 1, 2015, January 31, 2015 and August 2, 2014, none of the master netting arrangements involved collateral.

4. Fair value measurements

To determine the fair value of our assets and liabilities, we utilize the established fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative Financial Instruments

Currently, we use derivative financial arrangements to manage a variety of risk exposures, including interest rate risk associated with our Long-term debt and foreign currency risk relating to cross-currency intercompany lending and merchandise purchases. The valuation of our foreign currency contracts is determined using market-based foreign exchange rates, which are classified as Level 2 inputs. As of August 1, 2015, we did not have any outstanding interest rate contracts.

The valuation of our interest rate contracts is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. We evaluate the inputs used to value our derivatives at the end of each reporting period.

For our interest rate contracts, we primarily use Level 2 inputs mentioned above to arrive at fair value. Additionally, for interest rate contracts we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements taking into account the impact of any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. We measure the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. The portfolio-level adjustments are then allocated each period to the individual assets or liabilities within the portfolio.

The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying each counterparty’s credit spread to the applicable exposure. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. The inputs utilized for our own credit spread are based on implied spreads from our debt, which are considered unobservable inputs. These credit valuation adjustments fall within Level 3 of the fair value hierarchy and include estimates of current credit spreads to evaluate the likelihood of default. For counterparties with publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third party credit data provider. Generally, significant increases (decreases) in our own credit spread in isolation would result in significantly lower (higher) fair value measurement for these derivatives. Based on the mixed input valuation, we classify these derivatives based on the lowest level in the fair value hierarchy that is significant to the overall fair value of the instrument.

Any transfer into or out of a level of the fair value hierarchy is recognized based on the value of the instruments at the end of the reporting period.

The table below presents our assets and liabilities measured at fair value on a recurring basis as of August 1, 2015 and August 2, 2014, aggregated by level in the fair value hierarchy within which those measurements fall. There were no significant assets or liabilities measured at fair value on a recurring basis as of January 31, 2015.



(In millions)	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at August 1, 2015
Assets
Derivative financial instruments:
Foreign exchange contracts	$	—	$	4	$	—	$	4
Total liabilities	$	—	$	4	$	—	$	4



(In millions)	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at August 2, 2014
Assets
Derivative financial instruments:
Interest rate contracts	$	—	$	9	$	—	$	9
Total assets	$	—	$	9	$	—	$	9

For the periods ended August 1, 2015, January 31, 2015 and August 2, 2014, we had no derivative financial instruments within Level 3 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain of our assets and liabilities are measured at fair value on a nonrecurring basis. We evaluate the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment of long-lived assets is included in Other income, net on our Condensed Consolidated Statements of Operations.

The fair value measurements related to long-lived assets held and used classified as Level 3 were determined using a discounted cash flow valuation method or a relative, market-based approach based on purchase offers or appraisals we have received from third parties. The inputs we use to calculate discounted cash flows include the projected cash flows for the asset group (generally by store location) and, when significant, a risk-adjusted rate of return we estimate would be used by a market participant in valuing the assets. The projected cash flows are based on the Company’s sales, gross margin and expense forecasts for each asset group, taking into consideration historical cash flows, as well as anticipated costs and/or proceeds from disposal. For our market-based valuations, we use purchase offers we receive from third parties, predominantly for our properties, which are classified as Level 3 because they are not received in an organized market or observable to market participants. Alternatively, when management commits to sell properties and no third party offers exist, we use asset appraisals conducted by external specialists with experience in real estate valuations. These require a significant amount of judgment regarding appropriate comparable properties and their assessment of current market conditions.

For the twenty-six weeks ended August 1, 2015 and August 2, 2014, we had no impairments to long-lived assets held for sale. There have been no changes in valuation technique or related inputs for long-lived assets for the twenty-six weeks ended August 1, 2015 and August 2, 2014.

The table below presents our long-lived assets evaluated for impairment and measured at fair value on a nonrecurring basis for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, aggregated by level in the fair value hierarchy within which those measurements fall. Because these assets are not measured at fair value on a recurring basis, certain carrying amounts and fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent their fair values at August 1, 2015 and August 2, 2014. As of August 1, 2015 and August 2, 2014, we did not have any long-lived assets classified as Level 1 or 2 within the fair value hierarchy.



(In millions)	Carrying Value Prior to Impairment		Significant Unobservable Inputs (Level 3)		Impairment Losses
Long-lived assets held and used	$	2	$	1	$	1
Balance, May 2, 2015	2		1		1
Long-lived assets held and used	1		—		1
Balance, August 1, 2015	$	3	$	1	$	2



(In millions)	Carrying Value Prior to Impairment		Significant Unobservable Inputs (Level 3) (1)		Impairment Losses
Long-lived assets held and used	$	4	$	1	$	3
Balance, May 3, 2014	4		1		3
Long-lived assets held and used	4		1		3
Balance, August 2, 2014	$	8	$	2	$	6


(1)	Includes fair values based on offers received, which were previously classified as Level 2 and should have been Level 3, of $1 million as of August 2, 2014.

Other Financial Instruments

The fair values of our Long-term debt including current portion are estimated using quoted market prices for the same or similar issues and other pertinent information available to management as of the end of the respective periods. The fair values of debt instruments classified as Level 1 are based on quoted prices in reasonably active markets and Level 2 instruments are valued using market prices we obtain from external third parties. Debt instruments classified as Level 3 are not publicly traded, and therefore we are unable to obtain quoted market prices, and are generally valued using estimated spreads, a present value calculation or a cash flow analysis, as appropriate. There have been no significant changes in valuation technique or related inputs for Long-term debt for the twenty-six weeks ended August 1, 2015 and August 2, 2014. The table below presents the carrying values and fair values of our Long-term debt including current portion as of August 1, 2015, January 31, 2015 and August 2, 2014, aggregated by level in the fair value hierarchy within which those measurements fall.



	Long-term Debt
(In millions)	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
August 1, 2015	$	2,788	$	2,677	$	718	$	1,390	$	569
January 31, 2015	2,405		2,292		719		1,393		180
August 2, 2014	2,755		2,579		729		1,415		435

Other financial instruments that are not measured at fair value on our Condensed Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. Due to the short-term nature of these assets and liabilities, their carrying amounts approximate fair value.

5. Income taxes

The following table summarizes our Income tax expense and effective tax rates for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014:



	13 Weeks Ended						26 Weeks Ended
($ In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Loss before income taxes	$	(54	)	$	(107	)	$	(131	)	$	(231	)
Income tax expense	3			9			4			9
Effective tax rate	(5.6		)%	(8.4		)%	(3.1		)%	(3.9		)%

The effective tax rates for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014 were based on our forecasted annualized effective tax rates, adjusted for discrete items that occurred within the periods presented. Our forecasted annualized effective tax rate was (3.9%) for the twenty-six weeks ended August 1, 2015 compared to (3.7%) for the same period last year.

There were no significant discrete items that impacted our effective tax rate for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, respectively.

6. Segments

Our reportable segments are Toys “R” Us – Domestic (“Domestic”), which provides toy and baby product offerings in the United States, Puerto Rico and Guam, and Toys “R” Us – Canada (“Canada”), which operates in Canada. Domestic and Canada segments also include their respective Internet operations. Segment operating earnings (loss) excludes corporate related charges and income. All intercompany transactions between segments have been eliminated. Income tax information by segment has not been included as taxes are calculated at a company-wide level and are not allocated to each segment. Revenues from external customers are derived primarily from merchandise sales and we did not generate material sales from any single customer.

Our percentages of consolidated Total revenues by product category for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014 were as follows:



	13 Weeks Ended				26 Weeks Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Baby	44.8	%	45.5	%	46.5	%	46.8	%
Core Toy	14.0	%	13.2	%	13.5	%	12.7	%
Entertainment	5.5	%	6.1	%	6.3	%	6.9	%
Learning	18.3	%	17.8	%	18.1	%	17.7	%
Seasonal	15.5	%	15.7	%	14.0	%	14.2	%
Other (1)	1.9	%	1.7	%	1.6	%	1.7	%
Total	100	%	100	%	100	%	100	%


(1)	Consists primarily of non-product related revenues, including licensing fees from Parent’s foreign affiliates and certain third party licensees.

From time to time, we may make revisions to our prior period Total revenues by product category to conform to the current period allocation. These revisions did not have a significant impact to our prior year disclosure.

A summary of financial results by reportable segment is as follows:



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Total revenues
Domestic	$	1,427		$	1,478		$	2,933		$	3,036
Canada	166			172			321			338
Total revenues	$	1,593		$	1,650		$	3,254		$	3,374
Operating earnings (loss)
Domestic (1)	$	35		$	(20	)	$	59		$	(39	)
Canada	4			10			13			13
Corporate and other (1)	(54		)	(57		)	(117		)	(122		)
Operating loss	(15		)	(67		)	(45		)	(148		)
Interest expense	(64		)	(58		)	(134		)	(118		)
Interest income	25			18			48			35
Loss before income taxes	$	(54	)	$	(107	)	$	(131	)	$	(231	)

(1) Certain professional fees of $1 million and $6 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, that were previously recorded to our Domestic segment have been reclassified to our Corporate and other division.



(In millions)	August 1, 2015		January 31, 2015		August 2, 2014
Merchandise inventories
Domestic	$	1,410	$	1,353	$	1,442
Canada	152		142		169
Total Merchandise inventories	$	1,562	$	1,495	$	1,611

7. Litigation and legal proceedings

We and our Parent are, and in the future may be, involved in various lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us and our Parent, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We and our Parent are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages, and until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. However, based upon our and our Parent’s historical experience with similar matters, we do not expect that any such additional losses would be material to our consolidated financial position, results of operations or cash flows.

8. Related party transactions

Transactions with the Sponsors - Our Parent is owned by an investment group led by entities advised by or affiliated with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) and Vornado Realty Trust (“Vornado”) (collectively, the “Sponsors”). The Sponsors provide management and advisory services to us and our Parent pursuant to an advisory agreement executed at the closing of the merger transaction effective as of July 21, 2005 and amended June 10, 2008, February 1, 2009, August 29, 2014 and June 1, 2015 (“Advisory Agreement”). The initial term of the Advisory Agreement was ten years with the ability to extend annually for one year unless our Parent or the Sponsors provide notice of termination to the other.

In August 2014, the Advisory Agreement was amended in order to reduce the management and advisory fees paid to the Sponsors (the “Advisory Fees”) to $17 million. The amendment provides that if in the future our Parent successfully completes an initial public offering (“IPO”), the Sponsors may elect to receive from the proceeds of such IPO, an amount equal to the aggregate difference between: (x) the Advisory Fees that we would have paid in fiscal year 2014 and each fiscal year thereafter had such amounts not been fixed and (y) the Advisory Fees that were actually paid by us for fiscal year 2014 and each fiscal year thereafter.

In June 2015, the Advisory Agreement was further amended in order to reduce the Advisory Fees payable in fiscal 2015 and thereafter from $17 million to $6 million annually with no further adjustment upon an IPO for such reductions.

We recorded Advisory Fees of less than $1 million and $4 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively. We recorded Advisory Fees of $5 million and $11 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively. During each of the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, we also paid the Sponsors fees of less than $1 million, respectively, for out-of-pocket expenses.

Additionally, the Advisory Agreement provides that affiliates of the Sponsors will be entitled to receive a fee equal to 1% of the aggregate transaction value in connection with certain financing, acquisition, disposition and change of control transactions (“Transaction Fees”). The Advisory Agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates. In the event that the Advisory Agreement is terminated by the Sponsors or our Parent, the Sponsors will receive all unpaid Advisory Fees, all unpaid Transaction Fees and expenses due under the Advisory Agreement with respect to periods prior to the termination date plus the net present value of the Advisory Fees that would have been payable for the remainder of the applicable term of the Advisory Agreement. Transaction fees are capitalized as deferred debt issuance costs and are amortized over the term of the related debt agreement and included in Other assets on our Condensed Consolidated Balance Sheets.

From time to time, we and our subsidiaries, as well as the Sponsors or their affiliates, may acquire debt or debt securities issued by us or our subsidiaries in open market transactions, tender offers, exchange offers, privately negotiated transactions or otherwise. During the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, affiliates of KKR held debt and debt securities issued by us and our subsidiaries. The interest amounts on such debt and debt securities held by related parties were $1 million and $4 million during each of the thirteen and twenty-six weeks ended August 1, 2015, respectively and $2 million and $4 million during each of the thirteen and twenty-six weeks ended August 2, 2014, respectively.

Additionally, under lease agreements with affiliates of Vornado, we paid an aggregate amount of $2 million and $3 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively, with respect to 0.6% of our operated stores, which include Toys “R” Us Express stores. Of the aggregate amount paid, less than $1 million and $1 million for the thirteen and twenty-six weeks ended August 1, 2015 respectively, was allocable to joint-venture parties not otherwise affiliated with Vornado. For the thirteen and twenty-six weeks ended August 2, 2014, we paid an aggregate amount of $2 million and $3 million, respectively, with respect to 0.7% of our operated stores, which include Toys “R” Us Express stores. Of these amounts, less than $1 million and $1 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, was allocable to joint-venture parties not otherwise affiliated with Vornado.

Each of the Sponsors, either directly or through affiliates, has ownership interests in a broad range of companies (“Portfolio Companies”) with whom our Parent and its subsidiaries may from time to time enter into commercial transactions in the ordinary course of business, primarily for the purchase of goods and services. We believe that none of our transactions or arrangements with Portfolio Companies are significant enough to be considered material to the Sponsors or to our business.

Real Estate Arrangements with Affiliates - We leased 354 and 369 properties from affiliates of Parent as of August 1, 2015 and August 2, 2014, respectively. Selling, general and administrative expenses (“SG&A”) includes lease expense of $70 million and $143 million, respectively, which includes reimbursement of expenses of $12 million and $23 million related to these leases for the thirteen and twenty-six weeks ended August 1, 2015. For the thirteen and twenty-six weeks ended August 2, 2014, SG&A included lease expense of $73 million and $147 million, respectively, which includes reimbursement of expenses of $11 million and $22 million related to these leases.

Other Transactions with Toys “R” Us Property Company I, LLC (“TRU Propco I”) - Under the master lease agreement with our affiliate, TRU Propco I, we may be required to recognize an expense in conjunction with a store closure through the successful execution of a sale of a property by TRU Propco I to a third party or an early store closure prior to the expiration of the master lease agreement. Pursuant to the master lease agreement, the expense is equal to the net present value of the base rent for such property over the remaining term for such property, discounted at 10% per annum, less the sales proceeds for such property received by TRU Propco I or the anticipated sublease income to be received by the Company. For the thirteen and twenty-six weeks ended August 1, 2015, SG&A includes less than $1 million and $2 million, respectively, related to expenses associated with store closures. For the thirteen and twenty-six weeks ended August 2, 2014, we did not record any expenses associated with store closures and recorded $1 million, respectively, of such expenses in SG&A.

Management Service Fees and Other - We provide a majority of the centralized corporate functions including accounting, human resources, legal, tax and treasury services to Parent and other affiliates under the Domestic Services Agreement (“DSA”). The amounts charged are allocated based on a formula for each affiliate, as defined in the DSA, and are recorded in Other income, net on our Condensed Consolidated Statements of Operations. The amounts we charged to Parent and other

affiliates for the thirteen and twenty-six weeks ended August 1, 2015 for these services were $2 million and $3 million, respectively, and $1 million and $2 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively.

In addition, we incurred $3 million and $7 million of service fees for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, respectively. These costs, which primarily related to fees associated with our China sourcing office, are recorded within SG&A on our Condensed Consolidated Statements of Operations.

Information Technology and Administrative Support Services Agreement (the “ITASSA”) - We provide information technology services, internal audit services and financial services to a number of our international affiliates under the ITASSA. These affiliates are charged 108% of the costs we incur to administer such services. For the thirteen and twenty-six weeks ended August 1, 2015, our affiliates were charged $6 million and $15 million, respectively, for these services, which are recorded in Other income, net on our Condensed Consolidated Statements of Operations. For the thirteen and twenty-six weeks ended August 2, 2014, our affiliates were charged $6 million and $12 million, respectively, for these services.

Licensing Arrangements with Affiliates - We own intellectual property used by us and Parent’s foreign affiliates in the toy, baby and electronics businesses. In consideration for the use of our intellectual property, we charge a license fee based on a percentage of net sales, which management believes represents fair value. For the thirteen and twenty-six weeks ended August 1, 2015, we charged Parent’s foreign affiliates license fees of $13 million and $26 million, respectively, which are classified on our Condensed Consolidated Statements of Operations as Other revenues. For the thirteen and twenty-six weeks ended August 2, 2014, we charged Parent’s foreign affiliates license fees of $16 million and $31 million, respectively.

Dividends Paid to Parent - We make restricted payments or other distributions or advances to Parent for general corporate purposes including, among other things, to pay interest, repay, refinance, repurchase, redeem, defease or otherwise satisfy indebtedness of our Parent or any of its subsidiaries. For each of the twenty-six weeks ended August 1, 2015 and August 2, 2014, we paid no dividends to Parent.

Contributions Received from Parent - For the twenty-six weeks ended August 1, 2015, no contributions were received from Parent. For the twenty-six weeks ended August 2, 2014, we received a $19 million non-cash capital contribution from Parent for deferred financing costs associated with the amendment and restatement of the credit agreement for our ABL Facility.

Stock Compensation Expense - For the thirteen and twenty-six weeks ended August 1, 2015, $1 million and $2 million, respectively, of total stock-based compensation expense related to awards issued to participants by Parent was recognized in SG&A. For the thirteen and twenty-six weeks ended August 2, 2014, $2 million and $3 million, respectively, of total stock-based compensation expense was recognized.

Due from Affiliates, Net - As of August 1, 2015, January 31, 2015 and August 2, 2014, Due from affiliates, net, of $874 million, $835 million and $798 million, respectively, primarily consisted of receivables from Parent and affiliates. In connection with loans to and from Parent, we recognize related party interest expense and related party interest income.

As of August 1, 2015, January 31, 2015 and August 2, 2014, $14 million, $10 million and $16 million, respectively, of receivables from affiliates related primarily to license fees and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

Additionally, we are obligated to reimburse our affiliates for certain expenses, which primarily include rent and property taxes under lease agreements. As of August 1, 2015, January 31, 2015 and August 2, 2014, the net amount owed to our affiliates was $9 million, $13 million and $9 million, respectively. These amounts are included in Accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheets.

Short-term Borrowings from Parent - From time to time, we have short-term intercompany loans outstanding with Parent. As of August 1, 2015, January 31, 2015 and August 2, 2014, we maintained balances of $356 million, $376 million and $398 million, respectively, in short-term intercompany loans from Parent. For the thirteen and twenty-six weeks ended August 1, 2015 we incurred $2 million and $3 million, respectively, of related party interest expense associated with our short-term intercompany loans from Parent. For the thirteen and twenty-six weeks ended August 2, 2014 we incurred $1 million and $3 million, respectively, of such expenses.

9. Dispositions

During the thirteen weeks ended August 1, 2015, we sold a property and assets for proceeds of a nominal amount resulting in a nominal net gain. During the twenty-six weeks ended August 1, 2015, we sold certain properties and assets for proceeds of $1 million resulting in net gains of less than $1 million. Net gains on sales of properties are included in Other income, net on our Condensed Consolidated Statements of Operations.

10. Stock-based compensation

2015 Award exchange

In June 2015, certain participants under the 2010 Incentive Plan were offered an opportunity to exchange their unvested outstanding restricted stock units granted May 24, 2013 (“RSUs”) for a grant of two new stock options (“New Options”) for every one RSU canceled. The New Options have an exercise price of $8.00. On July 31, 2015, our Parent closed its offer with a total of 31,372 RSUs canceled and a total of 62,744 New Options issued under the Toys “R” Us, Inc. 2010 Incentive Plan. The New Options have a grant date of August 3, 2015 and vest 50% on each of May 24, 2016 and May 24, 2017, subject to the participant’s continued employment with the Company, and will vest automatically upon change of control of our Parent. These options expire ten years from the date of grant, subject to the earlier expiration in accordance with the New Option award agreement. We accounted for the modification in accordance with ASC Topic 718, “Compensation - Stock Compensation”. Management has concluded that the modification had no impact on compensation costs.

11. Accumulated other comprehensive loss

Total other comprehensive (loss) income, net of tax is included in the Condensed Consolidated Statements of Comprehensive Loss and Condensed Consolidated Statements of Stockholder’s Deficit. Accumulated other comprehensive loss is reflected in Total stockholder’s deficit on the Condensed Consolidated Balance Sheets, as follows:



(In millions)	Foreign currency translation adjustments, net of tax			Unrealized loss on hedged transactions, net of tax			Accumulated other comprehensive loss
Balance, February 1, 2014	$	(42	)	$	(1	)	$	(43	)
Change	5			—			5
Balance, May 3, 2014	(37		)	(1		)	(38		)
Change	—			1			1
Balance, August 2, 2014	$	(37	)	$	—		$	(37	)

(In millions)	Foreign currency translation adjustments, net of tax			Unrealized gain on hedged transactions, net of tax			Accumulated other comprehensive loss
Balance, January 31, 2015	$	(58	)	$	1		$	(57	)
Change	7			(1		)	6
Balance, May 2, 2015	(51		)	—			(51		)
Change	(10		)	—			(10		)
Balance, August 1, 2015	$	(61	)	$	—		$	(61	)

12. Recent accounting pronouncements

In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-12 “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965)” (“ASU 2015-12”). The amendments in Part I of ASU 2015-12 eliminated the requirements that employee benefit plans measure the fair value of fully benefit-responsive investment contracts and provide the related fair value disclosures, rather these contracts will be measured and disclosed only at contract value. The amendments in Part II of this ASU will require plans to disaggregate their investments measured using fair value only by general type, either on the financial statements or in the notes. Part II of this ASU also eliminated the requirement to disclose the net appreciation/depreciation in fair value of investments by general type and the requirement to disclose individual investments that represent 5% or more of net assets available for benefits. The amendments in Part III of ASU 2015-12 provides a practical expedient to permit plans to measure its investments and investment related accounts as of a month-end date closest to its fiscal year for a plan with a fiscal year end that does not coincide with the end of a calendar month. The amendments in this ASU are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Management is currently assessing the impact the adoption of ASU 2015-12 will have on the Condensed Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software licenses element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The adoption of ASU 2015-05 is not expected to have an impact on our Condensed Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the previous practice, debt issuance costs were recognized as a deferred charge (that is, an asset). This ASU will create consistencies with the guidance in International Financial Reporting Standards as well as the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements”, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. In August 2015, the FASB issued ASU 2015-15 “Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. According to ASU 2015-15, line-of-credit arrangements will continue to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt costs ratably over the term of the arrangement. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The amendments in ASU 2015-03 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity should apply the amendments on a retrospective basis to all prior periods presented in the financial statements. Other than the revised balance sheet presentation of debt issuance costs from an asset to a deduction from the carrying amount of the debt liability and related disclosures, the adoption of ASU 2015-03 is not expected to have an impact on our Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. As a result of the FASB issuing ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date” in August 2015, the amendments in this ASU are effective for reporting periods beginning after December 15, 2017, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the adoption methodology and the impact the adoption of ASU 2014-09 will have on our Condensed Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us – Delaware, Inc., a Delaware corporation, and its subsidiaries, except as expressly indicated or unless the context otherwise requires. The Company is a wholly-owned subsidiary of Toys “R” Us, Inc. (“Parent”). The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with our Annual Financial Statements for the fiscal year ended January 31, 2015, included as an exhibit to Parent’s Form 8-K filed on April 24, 2015 and the Condensed Consolidated Financial Statements and the accompanying notes thereto, and contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” below.

Our Business

We generate sales, earnings and cash flows by retailing merchandise in our baby, core toy, entertainment, learning and seasonal product categories in the United States, Canada, Puerto Rico and Guam. Our reportable segments are Toys “R” Us – Domestic (“Domestic”), which provides toy and baby product offerings in 864 stores in 49 states, Puerto Rico and Guam; and Toys “R” Us – Canada (“Canada”), in which we operated 82 stores. In addition, as of August 1, 2015, we operated 105 Toys “R” Us Express stores (“Express stores”), including 59 Express stores with a cumulative lease term of at least two years (“Permanent Express”). Domestic and Canada segments also include their respective Internet operations.

Financial Performance

As discussed in more detail in this MD&A, the following financial data presents an overview of our financial performance for the thirteen and twenty-six weeks ended August 1, 2015 compared to the thirteen and twenty-six weeks ended August 2, 2014:



	13 Weeks Ended						26 Weeks Ended
($ In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Total revenues	$	1,593		$	1,650		$	3,254		$	3,374
Gross margin	594			596			1,203			1,227
Gross margin as a percentage of Total revenues	37.3		%	36.1		%	37.0		%	36.4		%
Selling, general and administrative expenses	$	575		$	620		$	1,188		$	1,277
Selling, general and administrative expenses as a percentage of Total revenues	36.1		%	37.6		%	36.5		%	37.8		%
Net loss	$	(57	)	$	(116	)	$	(135	)	$	(240	)
Non-GAAP Financial Measure:
Adjusted EBITDA (1)	$	57		$	24		$	96		$	29

(1) For an explanation of Adjusted EBITDA as a measure of the Company’s operating performance and a reconciliation to Net loss, see “Non-GAAP Financial Measure - Adjusted EBITDA”.

Total revenues decreased by $57 million and $120 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively, compared to the same periods last year. Foreign currency translation decreased Total revenues by $26 million and $46 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively. Excluding the impact of foreign currency translation, the decrease in Total revenues for both periods was predominantly due to a decline in Domestic comparable store net sales and store closures within our Domestic segment. Partially offsetting the decrease in Total revenues for both periods was an increase in comparable store net sales within our Canada segment.

Gross margin, as a percentage of Total revenues, increased by 1.2 and 0.6 percentage points for the thirteen and twenty-six weeks ended August 1, 2015, respectively, compared to the same periods last year. The prior year Domestic margin rate for both periods was negatively impacted by previously identified clearance inventory. Additionally contributing to the increase in Gross margin for the twenty-six weeks ended August 1, 2015 was a margin rate improvement within our Domestic segment mainly attributable to continued promotional discipline in the current year.

Selling, general and administrative expenses (“SG&A”) decreased by $45 million and $89 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively, compared to the same periods last year. Foreign currency translation decreased SG&A by $7 million and $14 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively. Excluding the impact of foreign currency translation, the decrease in SG&A for both periods was primarily due to a reduction in payroll expenses and advertising and promotional expenses. Additionally contributing to the decrease was a reduction in advisory fees as a result of an amendment to the advisory agreement we have with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co. L.P., and Vornado Realty Trust (collectively, the “Sponsors”).

Net loss decreased by $59 million and $105 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively, compared to the same periods last year. The decrease in Net loss for both periods was primarily due to a reduction in SG&A and a decrease in Depreciation and amortization.

Comparable Store Net Sales

In computing comparable store net sales, we include stores that have been open for at least 56 weeks (1 year and 4 weeks) from their “soft” opening date. A soft opening is typically two weeks prior to the grand opening. Permanent Express stores that have been open for at least 56 weeks from their “soft” opening date are also included in our comparable store net sales computation.

Comparable stores include the following:


•	stores that have been remodeled (including conversions) while remaining open;


•	stores that have been relocated and/or expanded to new buildings within the same trade area, in which the new store opens at about the same time as the old store closes;


•	stores that have expanded within their current locations; and


•	sales from our Internet businesses.

By measuring the year-over-year sales of merchandise in the stores that have been open for a full comparable 56 weeks or more and on-line, we can better gauge how the core store base and e-commerce businesses are performing since comparable store net sales excludes the impact of store openings and closings.

Various factors affect comparable store net sales, including the number of and timing of stores we open, close, convert, relocate or expand, the number of transactions, the average transaction amount, the general retail sales environment, current local and global economic conditions, consumer preferences and buying trends, changes in sales mix among distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition, the timing of the release of new merchandise and our promotional events, the success of marketing programs and the cannibalization of existing store net sales by new stores. Among other things, weather conditions can affect comparable store net sales because inclement weather may discourage travel or require temporary store closures, thereby reducing customer traffic. These factors have caused our comparable store net sales to fluctuate significantly in the past on a monthly, quarterly and annual basis and, as a result, we expect that comparable store net sales will continue to fluctuate in the future.

The following table discloses the change in our comparable store net sales for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014:



	13 Weeks Ended				26 Weeks Ended
	August 1, 2015 vs. 2014		August 2, 2014 vs. 2013		August 1, 2015 vs. 2014		August 2, 2014 vs. 2013
Domestic	(2.5	)%	1.5	%	(2.4	)%	2.7	%
Canada	12.1	%	(0.7	)%	8.6	%	0.2	%
Toys “R” Us - Delaware	(1.0	)%	1.3	%	(1.3	)%	2.4	%

Percentage of Total Revenues by Product Category



	13 Weeks Ended				26 Weeks Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Baby	44.8	%	45.5	%	46.5	%	46.8	%
Core Toy	14.0	%	13.2	%	13.5	%	12.7	%
Entertainment	5.5	%	6.1	%	6.3	%	6.9	%
Learning	18.3	%	17.8	%	18.1	%	17.7	%
Seasonal	15.5	%	15.7	%	14.0	%	14.2	%
Other (1)	1.9	%	1.7	%	1.6	%	1.7	%
Total	100	%	100	%	100	%	100	%


(1)	Consists primarily of non-product related revenues, including licensing fees from Parent’s foreign affiliates and certain third party licensees.

Store Count by Segment



	August 1, 2015	August 2, 2014	Change
Domestic (1)	864	878	(14	)
Canada (2)	82	95	(13	)
Total (3)	946	973	(27	)

(1)

Store count as of August 1, 2015 includes 290 Toys “R” Us (“TRU”) stores, 224 Babies “R” Us (“BRU”) stores, 213 side-by-side (“SBS”) stores, 58 Juvenile Expansions, 20 Babies “R” Us Express (“BRU Express”) stores and 59 Permanent Express stores. Store count as of August 2, 2014 included 302 TRU stores, 230 BRU stores, 214 SBS stores, 59 Juvenile Expansions, 20 BRU Express stores and 53 Permanent Express stores.


(2)	Store count as of August 1, 2015 includes 56 SBS stores, 21 TRU stores, five BRU Express stores and no Permanent Express stores. Store count as of August 2, 2014 included 56 SBS stores, 22 TRU stores, five BRU Express stores and 12 Permanent Express stores.

(3)

There were 46 Domestic Express stores open as of August 1, 2015 and 57 Domestic Express stores open as of August 2, 2014. We had no Canada Express stores open as of August 1, 2015 and one Canada Express store open as of August 2, 2014. These stores were not included in our overall store count within our Domestic and Canada segments and are considered temporary as they have a cumulative lease term of less than two years.

Net Loss



	13 Weeks Ended								26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			Change		August 1, 2015			August 2, 2014			Change
Toys “R” Us - Delaware	$	(57	)	$	(116	)	$	59	$	(135	)	$	(240	)	$	105

Net loss decreased by $59 million to $57 million for the thirteen weeks ended August 1, 2015, compared to $116 million for the same period last year. The decrease in Net loss was primarily due to a reduction in SG&A of $45 million and a decrease in Depreciation and amortization of $6 million.

Net loss decreased by $105 million to $135 million for the twenty-six weeks ended August 1, 2015, compared to $240 million for the same period last year. The decrease in Net loss was primarily due to a reduction in SG&A of $89 million and a decrease in Depreciation and amortization of $22 million.

Total Revenues



	13 Weeks Ended
										Percentage of Total revenues
($ In millions)	August 1, 2015		August 2, 2014		$ Change			% Change		August 1, 2015		August 2, 2014
Domestic	$	1,427	$	1,478	$	(51	)	(3.5	)%	89.6	%	89.6	%
Canada	166		172		(6		)	(3.5	)%	10.4	%	10.4	%
Toys “R” Us - Delaware	$	1,593	$	1,650	$	(57	)	(3.5	)%	100.0	%	100.0	%

Total revenues decreased by $57 million or 3.5%, to $1,593 million for the thirteen weeks ended August 1, 2015, compared to $1,650 million for the same period last year. The impact of foreign currency translation decreased Total revenues by $26 million for the thirteen weeks ended August 1, 2015.

Excluding the impact of foreign currency translation, the decrease in Total revenues for the thirteen weeks ended August 1, 2015 was predominantly due to a decrease in Domestic comparable store net sales primarily driven by a decrease in the number of transactions, and store closures within our Domestic segment. Partially offsetting the decrease in Total revenues was an increase in comparable store net sales within our Canada segment primarily driven by an increase in the number of transactions.

Total revenues for the thirteen weeks ended August 1, 2015 and August 2, 2014 included $13 million and $16 million of licensing fees charged to our Parent’s foreign affiliates, respectively.



	26 Weeks Ended
										Percentage of Total revenues
($ In millions)	August 1, 2015		August 2, 2014		$ Change			% Change		August 1, 2015		August 2, 2014
Domestic	$	2,933	$	3,036	$	(103	)	(3.4	)%	90.1	%	90.0	%
Canada	321		338		(17		)	(5.0	)%	9.9	%	10.0	%
Toys “R” Us - Delaware	$	3,254	$	3,374	$	(120	)	(3.6	)%	100.0	%	100.0	%

Total revenues decreased by $120 million or 3.6%, to $3,254 million for the twenty-six weeks ended August 1, 2015, compared to $3,374 million for the same period last year. The impact of foreign currency translation decreased Total revenues by $46 million for the twenty-six weeks ended August 1, 2015.

Excluding the impact of foreign currency translation, the decrease in Total revenues for the twenty-six weeks ended August 1, 2015 was predominantly due to a decrease in Domestic comparable store net sales primarily driven by a decrease in the number of transactions, and store closures within our Domestic segment. Partially offsetting the decrease in Total revenues was an increase in comparable store net sales within our Canada segment primarily driven by an increase in the number of transactions.

Total revenues for the twenty-six weeks ended August 1, 2015 and August 2, 2014 included $26 million and $31 million of licensing fees charged to our Parent’s foreign affiliates, respectively.

Domestic

Total revenues for the Domestic segment decreased by $51 million or 3.5%, to $1,427 million for the thirteen weeks ended August 1, 2015, compared to $1,478 million for the same period last year. The decrease in Total revenues was primarily a result of a decline in comparable store net sales of 2.5%.

The decrease in comparable store net sales resulted primarily from decreases in our baby, entertainment and seasonal categories. The decrease in our baby category was mainly due to decreased sales of consumables. The decrease in our entertainment category was predominantly due to decreased sales of portable electronics and video game software. The decrease in our seasonal category was primarily due to decreased sales of outdoor products. Partially offsetting these decreases was an increase in our core toy category primarily as a result of increased sales of collectibles.

Total revenues for the Domestic segment decreased by $103 million or 3.4%, to $2,933 million for the twenty-six weeks ended August 1, 2015, compared to $3,036 million for the same period last year. The decrease in Total revenues was primarily a result of a decline in comparable store net sales of 2.4%.

The decrease in comparable store net sales resulted primarily from decreases in our baby, entertainment and seasonal categories. The decrease in our baby category was mainly due to decreased sales of consumables. The decrease in our entertainment category was primarily due to decreased sales of portable electronics and video game software. The decrease in our seasonal category was predominantly due to decreased sales of outdoor products. Partially offsetting these decreases was an increase in our core toy category primarily as a result of increased sales of collectibles.

Canada

Total revenues for our Canada segment decreased by $6 million or 3.5%, to $166 million for the thirteen weeks ended August 1, 2015, compared to $172 million for the same period last year. Excluding a $26 million decrease in Total revenues due to foreign currency translation, Canada Total revenues increased primarily as a result of an increase in comparable store net sales of 12.1%.

The increase in comparable store net sales resulted primarily from increases in our baby, learning and core toy categories. The increase in our baby category was predominantly due to increased sales of baby gear and infant care products. The increase in our learning category was primarily due to increased sales of construction toys. The increase in our core toy category was primarily due to increased sales of collectibles.

Total revenues for the Canada segment decreased by $17 million or 5.0%, to $321 million for the twenty-six weeks ended August 1, 2015, compared to $338 million for the same period last year. Excluding a $46 million decrease in Total revenues due to foreign currency translation, Canada Total revenues increased primarily as a result of an increase in comparable store net sales of 8.6%.

The increase in comparable store net sales resulted primarily from increases in our baby, learning and seasonal categories. The increase in our baby category was predominantly due to increased sales of baby gear and infant care products. The increase in

our learning category was primarily due to increased sales of construction toys. The increase in our seasonal category was primarily due to increased sales of outdoor products.

Gross Margin

The following are reflected in “Cost of sales”:


•	the cost of merchandise acquired from vendors;


•	freight in;


•	provision for excess and obsolete inventory;


•	shipping costs to consumers;


•	provision for inventory shortages; and


•	credits and allowances from our merchandise vendors.

We record the costs associated with operating our distribution networks as a part of SG&A, including those costs that primarily relate to transporting merchandise from distribution centers to stores. Therefore, our consolidated Gross margin may not be comparable to the gross margins of other retailers that include similar costs in their cost of sales.



	13 Weeks Ended
								Percentage of Total revenues
($ In millions)	August 1, 2015		August 2, 2014		$ Change			August 1, 2015		August 2, 2014		Change
Domestic	$	528	$	526	$	2		37.0	%	35.6	%	1.4	%
Canada	66		70		(4		)	39.8	%	40.7	%	(0.9	)%
Toys “R” Us - Delaware	$	594	$	596	$	(2	)	37.3	%	36.1	%	1.2	%

Gross margin decreased by $2 million to $594 million for the thirteen weeks ended August 1, 2015, compared to $596 million for the same period last year. Foreign currency translation decreased Gross margin by $10 million.

Gross margin, as a percentage of Total revenues, increased by 1.2 percentage points for the thirteen weeks ended August 1, 2015 compared to the same period last year. The increase in Gross margin, as a percentage of Total revenues, was attributable to a prior year $19 million loss on previously identified clearance inventory within our Domestic segment.



	26 Weeks Ended
								Percentage of Total revenues
($ In millions)	August 1, 2015		August 2, 2014		$ Change			August 1, 2015		August 2, 2014		Change
Domestic	$	1,079	$	1,093	$	(14	)	36.8	%	36.0	%	0.8	%
Canada	124		134		(10		)	38.6	%	39.6	%	(1.0	)%
Toys “R” Us - Delaware	$	1,203	$	1,227	$	(24	)	37.0	%	36.4	%	0.6	%

Gross margin decreased by $24 million to $1,203 million for the twenty-six weeks ended August 1, 2015, compared to $1,227 million for the same period last year. Foreign currency translation decreased Gross margin by $18 million.

Gross margin, as a percentage of Total revenues, increased by 0.6 percentage points for the twenty-six weeks ended August 1, 2015 compared to the same period last year. The increase in Gross margin, as a percentage of Total revenues, was primarily the result of a margin rate improvement within our Domestic segment mainly attributable to continued promotional discipline in the current year. The prior year Domestic rate was negatively impacted by previously identified clearance inventory.

Domestic

Gross margin increased by $2 million to $528 million for the thirteen weeks ended August 1, 2015, compared to $526 million for the same period last year. Gross margin, as a percentage of Total revenues, increased by 1.4 percentage points for the thirteen weeks ended August 1, 2015 compared to the same period last year.

The increase in Gross margin, as a percentage of Total revenues, resulted from margin improvements predominantly in our learning, entertainment and baby categories. The current year margin rate improvement is due to a prior year $19 million loss on previously identified clearance inventory.

Gross margin decreased by $14 million to $1,079 million for the twenty-six weeks ended August 1, 2015, compared to $1,093 million for the same period last year. Gross margin, as a percentage of Total revenues, increased by 0.8 percentage points for the twenty-six weeks ended August 1, 2015 compared to the same period last year.

The increase in Gross margin, as a percentage of Total revenues, resulted from margin improvements predominantly in our baby, entertainment and learning categories. The current year margin rate improvement is largely due to a prior year $8 million loss on previously identified clearance inventory.

Canada

Gross margin decreased by $4 million to $66 million for the thirteen weeks ended August 1, 2015, compared to $70 million for the same period last year. Foreign currency translation decreased Gross margin by $10 million. Gross margin, as a percentage of Total revenues, decreased by 0.9 percentage points for the thirteen weeks ended August 1, 2015 compared to the same period last year.

The decrease in Gross margin, as a percentage of Total revenues, resulted primarily from increased cost of merchandise due to an adverse impact from foreign currency translation.

Gross margin decreased by $10 million to $124 million for the twenty-six weeks ended August 1, 2015, compared to $134 million for the same period last year. Foreign currency translation decreased Gross margin by $18 million. Gross margin, as a percentage of Total revenues, decreased by 1.0 percentage point for the twenty-six weeks ended August 1, 2015 compared to the same period last year.

The decrease in Gross margin, as a percentage of Total revenues, resulted primarily from increased cost of merchandise due to an adverse impact from foreign currency translation.

Selling, General and Administrative Expenses

The following table presents expenses as a percentage of consolidated SG&A:



	13 Weeks Ended				26 Weeks Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Payroll and related benefits	43.4	%	44.0	%	42.7	%	43.6	%
Occupancy costs	35.7	%	33.0	%	35.2	%	33.0	%
Advertising and promotional expenses	5.4	%	6.3	%	5.8	%	7.0	%
Transaction fees (1)	3.4	%	3.3	%	3.4	%	3.3	%
Professional fees	3.3	%	4.2	%	4.0	%	4.1	%
Other (2)	8.8	%	9.2	%	8.9	%	9.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%


(1)	Primarily consists of credit card fees.


(2)	Includes costs related to transporting merchandise from distribution centers to stores, website hosting, store related supplies and signage and other corporate-related expenses.



	13 Weeks Ended
						Percentage of Total revenues
($ In millions)	August 1, 2015	August 2, 2014	$ Change			August 1, 2015		August 2, 2014		Change
Toys “R” Us - Delaware	575	620	$	(45	)	36.1	%	37.6	%	(1.5	)%

SG&A decreased by $45 million to $575 million for the thirteen weeks ended August 1, 2015, compared to $620 million for the same period last year. Foreign currency translation decreased SG&A by $7 million. As a percentage of Total revenues, SG&A decreased by 1.5 percentage points.

Excluding the impact of foreign currency translation, SG&A decreased by $38 million primarily due to a $21 million decrease in payroll expenses, which included a $15 million decline in store payroll expenses, and an $8 million decrease in advertising and promotional expenses. Additionally contributing to the decrease was a $5 million reduction in advisory fees as a result of an amendment to the advisory agreement our parent has with the Sponsors.



	26 Weeks Ended
						Percentage of Total revenues
($ In millions)	August 1, 2015	August 2, 2014	$ Change			August 1, 2015		August 2, 2014		Change
Toys “R” Us - Delaware	1,188	1,277	$	(89	)	36.5	%	37.8	%	(1.3	)%

SG&A decreased by $89 million to $1,188 million for the twenty-six weeks ended August 1, 2015, compared to $1,277 million for the same period last year. Foreign currency translation decreased SG&A by $14 million. As a percentage of Total revenues, SG&A decreased by 1.3 percentage points.

Excluding the impact of foreign currency translation, SG&A decreased by $75 million primarily due to a $43 million decrease in payroll expenses, which included a $29 million decline in store payroll expenses. Additionally contributing to the decrease was a $20 million decrease in advertising and promotional expenses and a $7 million reduction in advisory fees as a result of an amendment to the advisory agreement our Parent has with the Sponsors.

Depreciation and Amortization



	13 Weeks Ended							26 Weeks Ended
(In millions)	August 1, 2015		August 2, 2014		Change			August 1, 2015		August 2, 2014		Change
Toys “R” Us - Delaware	$	58	$	64	$	(6	)	$	115	$	137	$	(22	)

Depreciation and amortization decreased by $6 million to $58 million for the thirteen weeks ended August 1, 2015, compared to the same period last year. The decrease was primarily due to fully depreciated assets.

Depreciation and amortization decreased by $22 million to $115 million for the twenty-six weeks ended August 1, 2015, compared to the same period last year. The decrease was primarily due to the prior year accelerated depreciation of certain assets, which we committed to dispose of prior to the end of their useful lives, and fully depreciated assets.

Other Income, Net

Other income, net includes the following:


•	credit card program income;


•	foreign exchange gains and losses;


•	information technology and administrative support service income;


•	gift card breakage income;


•	management service fees income;


•	impairment of long-lived assets; and


•	other operating income and expenses.



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015		August 2, 2014		Change		August 1, 2015		August 2, 2014		Change
Toys “R” Us - Delaware	$	24	$	21	$	3	$	55	$	39	$	16

Other income, net increased by $3 million to $24 million for the thirteen weeks ended August 1, 2015, compared to $21 million for the same period last year. The increase was primarily due to an $8 million increase in credit card program income and a $2 million decrease in impairment of long-lived assets. Partially offsetting the increase in Other income, net was $9 million in unrealized loss on foreign exchange related to the re-measurement of the Tranche A-1 loan facility due fiscal 2019 attributed to Toys “R” Us (Canada) Ltd. Toys “R” Us (Canada) Ltee (“Toys-Canada”).

Other income, net increased by $16 million to $55 million for the twenty-six weeks ended August 1, 2015, compared to $39 million for the same period last year. The increase was primarily due to an $8 million increase in credit card program income and a $4 million decrease in impairment of long-lived assets.

Interest Expense



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015		August 2, 2014		Change		August 1, 2015		August 2, 2014		Change
Toys “R” Us - Delaware	$	64	$	58	$	6	$	134	$	118	$	16

Interest expense increased by $6 million to $64 million for the thirteen weeks ended August 1, 2015, compared to $58 million for the same period last year. Interest expense increased by $16 million to $134 million for the twenty-six weeks ended August 1, 2015, compared to $118 million for the same period last year. The increase in Interest expense for both periods was primarily due to a higher rate of interest on the Secured term B-4 loan facility due fiscal 2020 and the Tranche A-1 loan facility due fiscal 2019 as a result of the fiscal 2014 refinancing.

Interest Income



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015		August 2, 2014		Change		August 1, 2015		August 2, 2014		Change
Toys “R” Us - Delaware	$	25	$	18	$	7	$	48	$	35	$	13

Interest income increased by $7 million to $25 million for the thirteen weeks ended August 1, 2015, compared to $18 million for the same period last year. Interest income increased by $13 million to $48 million for the twenty-six weeks ended August 1, 2015, compared to $35 million for the same period last year. The increase in Interest income for both periods was primarily due to an increase in interest income on loans receivable from Parent. Refer to Note 8 to the Condensed Consolidated Financial Statements entitled “Related party transactions” for further details.

Income Tax Expense

The following table summarizes our Income tax expense and effective tax rates for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014:



	13 Weeks Ended						26 Weeks Ended
($ In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Loss before income taxes	$	(54	)	$	(107	)	$	(131	)	$	(231	)
Income tax expense	3			9			4			9
Effective tax rate	(5.6		)%	(8.4		)%	(3.1		)%	(3.9		)%

There were no significant discrete items that impacted our effective tax rate for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, respectively.

Non-GAAP Financial Measure - 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.

A reconciliation of Net loss to EBITDA and Adjusted EBITDA is as follows:



	13 Weeks Ended						26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Net loss	$	(57	)	$	(116	)	$	(135	)	$	(240	)

Add:
Income tax expense	3			9			4			9
Interest expense, net	39			40			86			83
Depreciation and amortization	58			64			115			137
EBITDA	43			(3		)	70			(11		)

Adjustments:
Foreign currency re-measurement (a)	9			—			3			—
Severance (b)	4			2			8			12
Impairment of long-lived assets	1			3			2			6
Store closure costs (c)	—			—			7			5
Compensation expense (d)	—			4			2			4
Sponsors’ management and advisory fees (e)	—			5			4			11
Certain transaction costs	—			1			—			1
Net gains on sales of properties	—			(1		)	—			(1		)
Property losses, net of insurance recoveries (f)	—			(7		)	—			(7		)
Obsolete inventory clearance (g)	—			20			—			9
Adjusted EBITDA (h)	$	57		$	24		$	96		$	29


(a)	Represents the unrealized loss on foreign exchange related to the re-measurement of the portion of the Tranche A-1 loan facility due fiscal 2019 attributed to Toys-Canada.


(b)	In fiscal 2014, we revised our definition of Adjusted EBITDA to include non-officers’ severance. We have therefore revised our prior periods’ Adjusted EBITDA.


(c)	Represents store closure costs, net of lease surrender income. In fiscal 2014, we revised our definition of Adjusted EBITDA to include lease surrender income. We have therefore revised our prior periods’ Adjusted EBITDA.


(d)	Represents the incremental compensation expense related to certain one-time awards and modifications, net of forfeitures of certain officers’ awards. In fiscal 2014, we revised our definition of Adjusted EBITDA to include the impact of forfeitures of certain officers’ awards and have therefore revised our prior periods’ Adjusted EBITDA.


(e)	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.


(f)	Represents property losses and insurance claims recognized.


(g)	Represents an incremental loss on previously identified clearance inventory. In fiscal 2014, we also revised our definition of Adjusted EBITDA to include third party fees associated with our clearance efforts. We have therefore revised our prior periods’ Adjusted EBITDA.


(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, restructuring 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.

Liquidity and Capital Resources

Overview

As of August 1, 2015, we were in compliance with all of the covenants related to our outstanding debt. Under the $1.85 billion secured revolving credit facility (“ABL Facility”), we had outstanding borrowings of $377 million, a total of $96 million of outstanding letters of credit and excess availability of $622 million as of August 1, 2015. We are also subject to a minimum excess availability covenant of $125 million, with remaining availability of $497 million in excess of the covenant at August 1, 2015.

We are dependent on borrowings to support our working capital needs, capital expenditures and to service debt. As of August 1, 2015, we have funds available to finance our operations under our ABL Facility through March 2019, subject to an earlier springing maturity. If our cash flow and capital resources do not provide the necessary liquidity, it could have a significant negative effect on our results of operations.

In general, our primary uses of cash are providing for working capital purposes (which principally represents the purchase of inventory), servicing debt, remodeling existing stores, financing construction of new stores and paying expenses, such as payroll costs and rental expense, to operate our stores. Our working capital needs follow a seasonal pattern, peaking in the third quarter of the year when inventory is purchased for the fourth quarter holiday selling season.

In addition, from time to time, we may have short-term intercompany loans outstanding from Parent. As of August 1, 2015, January 31, 2015 and August 2, 2014, we had outstanding balances of $356 million, $376 million and $398 million, respectively, in short-term intercompany loans from Parent.

Our largest source of operating cash flows is cash collections from our customers. We have been able to meet our cash needs principally by using cash on hand, cash flows from operations and borrowings under our ABL Facility and from our Parent. From time to time, we may enter into intercompany loans with Parent or pay dividends to Parent as permitted under our debt instruments. The funds provided to Parent may be used for general purposes, including, without limitation, for paying interest, repaying, refinancing, repurchasing, redeeming, defeasing or otherwise satisfying indebtedness of our Parent or of its subsidiaries.

Although we believe that cash generated from operations along with our existing cash and ABL Facility will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next 12 months, any world-wide financial market disruption could have a negative impact on our ability to refinance our maturing debt and available resources in the future.

Capital Expenditures

A component of our long-term strategy is our capital expenditure program. Our capital expenditures are primarily for financing construction of new stores and maintaining existing stores, as well as improving and enhancing our e-commerce and other information technology and logistics systems. Capital expenditures are funded primarily through cash provided by operating activities, as well as available cash.

The following table presents our capital expenditures for the twenty-six weeks ended August 1, 2015 and August 2, 2014:



	26 Weeks Ended
(In millions)	August 1, 2015		August 2, 2014
Information technology	$	30	$	24
Maintenance (1)	12		10
Distribution centers	5		10
New stores	1		4
Other store-related projects	11		6
Total capital expenditures	$	59	$	54


(1)	Includes maintenance for existing stores, including expenditures related to the “Clean and Bright” initiative.

Cash Flows



	26 Weeks Ended
(In millions)	August 1, 2015			August 2, 2014			$ Change
Net cash used in operating activities	$	(256	)	$	(379	)	$	123
Net cash used in investing activities	(58		)	(52		)	(6		)
Net cash provided by financing activities	344			311			33
Effect of exchange rate changes on Cash and cash equivalents	—			1			(1		)
Net increase (decrease) during period in Cash and cash equivalents	$	30		$	(119	)	$	149

Cash Flows Used in Operating Activities

Net cash used in operating activities decreased $123 million to $256 million for the twenty-six weeks ended August 1, 2015, compared to $379 million for the twenty-six weeks ended August 2, 2014. The decrease in Net cash used in operating activities was primarily due to improved operating performance and a decrease in vendor payments due to timing, partially offset by annual bonus payout.

Cash Flows Used in Investing Activities

Net cash used in investing activities increased $6 million to $58 million for the twenty-six weeks ended August 1, 2015, compared to $52 million for the twenty-six weeks ended August 2, 2014. The increase in Net cash used in investing activities was primarily due to a $5 million increase in capital expenditures.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities increased $33 million to $344 million for the twenty-six weeks ended August 1, 2015, compared to $311 million for the twenty-six weeks ended August 2, 2014. The increase in Net cash provided by financing activities was primarily due to a $123 million increase in net long-term debt borrowings, partially offset by a $102 million decrease in net short-term borrowings from Parent. Refer to Note 2 to the Condensed Consolidated Financial Statements entitled “Long-term debt” for further details regarding our debt.

Debt

Refer to Note 2 to the Condensed Consolidated Financial Statements entitled “Long-term debt” for further details regarding our debt.

As of August 1, 2015, we had total indebtedness (excluding Short-term borrowings from Parent) of $2,788 million, of which $2,574 million was secured indebtedness. During the twenty-six weeks ended August 1, 2015, there were no significant events that occurred with respect to our debt structure.

We and our subsidiaries, as well as the Sponsors or their affiliates, may from time to time acquire debt or debt securities issued by us or our subsidiaries in open market transactions, tender offers, exchange offers, privately negotiated transactions or otherwise. Any such transactions, and the amounts involved, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Refer to Note 8 to our Condensed Consolidated Financial Statements entitled “Related party transactions” and Note 15, entitled “RELATED PARTY

TRANSACTIONS,” to our Annual Financial Statements for the fiscal year ended January 31, 2015 included as an exhibit to Parent’s Form 8-K filed on April 24, 2015.

Contractual Obligations

Our contractual obligations consist mainly of payments for operating leases related to real estate used in the operation of our business, Long-term debt and related interest and product purchase obligations. Refer to the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Financial Statements for the fiscal year ended January 31, 2015 included as an exhibit to Parent’s Form 8-K filed on April 24, 2015, for details on our contractual obligations.

Critical Accounting Policies

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical experience and on other factors that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and could have a material impact on our Condensed Consolidated Financial Statements. Refer to our Annual Financial Statements for the fiscal year ended January 31, 2015 included as an exhibit to Parent’s Form 8-K filed on April 24, 2015, for a discussion of critical accounting policies.

Recently Adopted Accounting Pronouncements

In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-13 “Derivative and Hedging (Topic 815): Application of the Normal Purchase and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets” (“ASU 2015-13). Current GAAP does not contain specific guidance about whether the use of locational marginal pricing by an independent system operator results in net settlement of a contract for the purchase or sale of electricity on a forward basis that necessitates transmission through, or delivery to a location within, a nodal energy market. ASU 2015-13 specifies that entities would not be precluded from applying the normal purchase and normal sales exception to derivative accounting to forward contracts for the physical delivery of electricity in nodal energy markets that result in parties incurring locational margin pricing charges or credits. The new guidance in ASU 2015-13 states that the use of locational marginal pricing by an independent system operator to determine a transmission charge or credit in a nodal energy market would not constitute a net settlement of a forward contract for the purchase or sale of electricity, even when legal title to the electricity is conveyed to the independent system operator during transmission. The Company has adopted the amendments in ASU 2015-13, effective August 10, 2015, as the amendments in the update are effective upon issuance. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The FASB defines net realizable value as the “estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” Under current guidance, an entity subsequently measures inventory at the lower of cost or market, with market defined as the replacement cost, net realizable value or net realizable value less a normal profit margin. An entity uses current replacement cost provided that it is not above net realizable value (i.e. the ceiling) or below net realizable value less an “approximately normal profit margin” (i.e. the floor). ASU 2015-11 eliminates this analysis for entities within the scope of the guidance. ASU 2015-11 applies to entities that recognize inventory within the scope of ASC 330, except for inventory measured under the LIFO method or the retail inventory method. The Company has early adopted the amendments in ASU 2015-11, effective May 3, 2015. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In May 2015, the FASB issued ASU 2015-08, “'Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115” (“ASU 2015-08”). The amendments in ASU 2015-08 amend various SEC paragraphs included in the FASB’s Accounting Standards Codification to reflect the issuance of Staff Accounting Bulletin No. 115 (“SAB 115”). SAB 115 rescinds portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletins series and brings existing guidance into conformity with ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting,” which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The Company has adopted the amendments in ASU 2015-08, effective May 8, 2015, as the amendments in the update are effective upon issuance. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, the other reports and documents that the Parent has filed or may in the future file with the Securities and Exchange Commission and other publicly released materials and statements, both oral and written, that we have made or may make in the future, may contain “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, and such disclosures are intended to be covered by the safe harbors created thereby. These forward looking statements reflect our current views with respect to, among other things, our operations and financial performance. All statements herein or therein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases, such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “believe,” “intend,” “foresee,” “forecast,” “will,” “may,” “outlook” or the negative version of these words or other similar words or phrases. These statements discuss, among other things, our strategy, store openings, integration and remodeling, the development, implementation and integration of our Internet business, future financial or operational performance, projected sales for certain periods, comparable store net sales from one period to another, cost savings, results of store closings and restructurings, outcome or impact of pending or threatened litigation, domestic or international developments, amount and allocation of future capital expenditures, growth initiatives, inventory levels, cost of goods, selection and type of merchandise, marketing positions, implementation of safety standards, future financings, estimates regarding future effective tax rates, and other goals and targets and statements of the assumptions underlying or relating to any such 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, marketing strategies, the availability of adequate financing, 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 under Item 1A entitled “RISK FACTORS” of our Parent’s Annual Report on Form 10-K filed on March 26, 2015, as well as our Parent’s other reports and documents filed with the Securities and Exchange Commission. 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. These factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this report. 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.

TOYS R US INC - FORM 8-K - EX-99.1 - TOYS-DELAWARE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - September 15, 2015

Attached files

TOYS R US INC Reports