A Comprehensive Financial Analysis

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A Comprehensive Financial Analysis

Of

TOYS R US

TABLE OF CONTENTS

Company Overview ………………………………………………. 4

Key Facts……………………………………………………………… 4

Business Description……………………………………………. 5

History …………………………………………………………………. 6

Key Employees …………………………………………………….. 7

Major Products And Services………………………………. 12

Products And Services Analysis………………………….. 13

SWOT Analysis …………………………………………………… 14

Top Competitors …………………………………………………. 18

Company View ……………………………………………………. 19

Locations and Subsidiaries…………………………………. 24

HISTORY

Toys “R” Us was established in 1948 as a baby furniture store in Washington DC, by

Charles Lazarus at the young age of 25 . Mr. Lazarus began a business totally dedicated to kids and their needs just in time for the post-war baby boom era. The store started off by selling baby toys first, and then toys for older children, as it responded to customer demand. In 1957, Lazarus opened the first toy supermarket, which combined specialty retailing and off-price positioning. In May 1999, the company formed a new division, Toysrus.com. The following year, Toysrus.com teamed up with Amazon.com to form a co-branded online toy store.

ANALYSIS OF TOY R US MAJOR INDUSTRY

Toys “R” Us specializes in the provision of toys, apparel and baby needs to children

and their families. The Toys “R” Us family, which includes Toys “R” Us, Babies “R” Us,

Imaginarium and Toysrus.com. It has operations in 25 countries, mainly the US,

Japan, Canada, and Europe, and sells toys, games, bicycles, sporting goods, VHS

video tapes, electronic and video games, small pools, books, infant and juvenile

furniture and similar items and electronics, as well as educational and entertainment

computer software for children.

DESCRIPTION OF PRODUCT AND SERVICE LINE

Toys R Us, Inc is engaged in the operation of retail stores consisting of U.S. locations comprised of toy stores under the name Toys R Us, children’s clothing stores under the name Kids R Us, infant-toddler stores under the name Babies R Us, and educational specialty stores under the name Imaginarium. Internationally, the company operates toy stores under the name Toys R Us. It also sells merchandise through its Internet sites and through mail order catalogues. Its products include:

Action Figures

Activities ; Learning

Arts ; Crafts

Baby Toys

Bikes

Scooters

Ride-ons

Skateboards

Skates

Blocks

Building Sets

Models

Dolls

Furniture

Games ; Puzzles

Pretend Play ; Dress-Up

Sports ; Outdoor Play

Stuffed Animals ; Toys

Vehicles ; Die-Cast

Video Game

Toys “R” Us International operates or franchises toy stores in more than 25 countries

outside the US. These stores generally conform to traditional prototypical designs

similar to those used by Toys “R” Us, USA. It also employs computerized inventory

systems similar to those utilized by Toys “R” Us, USA.

SENIOR MANAGEMENT TEAM

John H. Eyler, Jr

Chairman and Chief Executive Officer

John Eyler joined Toys”R”Us, Inc. as President and Chief Executive Officer in January 2000. He was named Chairman in June 2001. Prior to joining Toys”R”Us, Inc., Mr. Eyler was Chairman and Chief Executive Officer of FAO Schwarz in New York. Mr. Eyler is Chairman of the Board of Directors of Toys”R”Us, Inc.

Ray Arthur Chief Financial Officer Toys”R”Us, Inc.

Ray Arthur was appointed Chief Financial Officer of Toys”R”Us, Inc. in 2004.

Mr. Arthur is an experienced finance and operating executive. As President of Toysrus.com, he was responsible for all aspects of the business and for driving Toysrus.com’s diversification and expansion plans worldwide.

Francesca L. Brockett Executive Vice President Chief Strategy and Corporate Structure Officer

Francesca L. Brockett, is Executive Vice President, Strategic Planning and Business Development for Toys”R”Us, Inc. In this position she is responsible for identifying and championing future growth opportunities and leading overall strategy development for the company.

Deborah Derby Executive Vice President, Human Resources

Toys”R”Us, Inc.

Deborah Derby is Executive Vice President of Human Resources for Toys”R”Us, Inc. In this position, she oversees the Human Resource organization for all of the companys divisions worldwide.

Christopher K. Kay Executive Vice President, OperationsCorporate Secretary Toys”R”Us, Inc.

Christopher Kay, is Executive Vice President of Operations at Toys”R”Us, Inc. He also serves as the company’s Corporate Secretary. He was promoted in February 2002 to his new position, he is responsible for key functions of the business including purchasing, MIS, real estate and construction, corporate communications, legal, guest services, labor planning and office operations.

Major Products And Services

ORGANIZATIONAL STRUCTURE

Toys “R” Us engages in the operation of over 1,500 retail stores worldwide, under the

brand names: Toys “R” Us, Babies “R” Us, and Imaginarium.

In the US, the company operates around 680 Toys “R” Us stores, and about 180

Babies “R” Us stores for infant toddlers, and approximately 35 educational specialty

stores (Imaginarium). Internationally, it operates over 575 toy stores, including franchise and joint venture stores, under the Toys “R” Us brand name. The company also sells merchandise through its Internet sites at www.toysrus.com and www.imaginarium.com, and through mail order catalogues. The company also operates combo stores, which sell apparel along with toys and games. Toys “R” Us International operates or franchises toy stores in more than 25 countries outside the US. These stores generally conform to traditional prototypical designs similar to those used by Toys “R” Us, USA. It also employs computerized inventory systems similar to those utilized by Toys “R” Us, USA. The company has approximately 114,000 employees worldwide. Toys R Us.Inc. and subsidiaries are located in:

Head Office

Toys “R” Us, Inc. (TRU)

1 Geoffrey Way

Wayne, NJ 07470

United States

P: 1 973 617 5756

www.toysrus.com

Toys R Us (Japan)

Solid Square West Tower

12th Floor

580 Horikawa-Cho

Saiwa-Ku, Kawasaki 212-8566

Japan

P: 81 44 549 9072

F: 81 44 549 9140

www.toysrus.co.jp

Toys “R” Us Limited

Mitre House

160 Aldersgate Street

London

EC1A 4DD

United Kingdom

P: 44 20 8881 6636

International growth

Toys R Us has much scope for growth opportunities outside of the United States for

the Toys R Us store format. During 2003, 37 Toys R Us stores were opened

internationally, of which six are operated by the company. It plans to open

approximately 36 additional Toys R Us stores internationally in 2004, of which

approximately nine will be operated by it. In addition, Toys R Us Japan, an equity

investee , operated three Babies R Us stores as of January 31, 2004 and plans to

open six additional Babies R Us stores in Japan in 2004.

The companys conservative financial posture and expected reduction in leverage

over the next few years is helping to overcome short-term financial difficulties. Moreover the company should be in a positive free cash flow position over the next few years.

Threats

CONCLUSIONRestriction of Imports

A significant portion of the toys and other products sold by Toys R Us are

manufactured outside of the United States. As a result, any event causing a disruption

of imports, including the imposition of import and trade restrictions or acts of war or

terrorism, could increase the cost and reduce the supply of products available. This

could in turn negatively affect net sales and profitability.

Highly competitive environment

The retailing industry is highly competitive, and revenues are sensitive to competitive

pricing, promotional pressures, additional store openings and other factors. Toys R

Us competes with discount and mass merchandisers, such as Wal-Mart, Target and

Kmart, national and regional chains and local retailers. Competitive pressure from

Wal-Mart and Target is expected to intensify in the fourth quarter, when both chains

use toys to drive store traffic. This pressure will be sustained over 2004-2005, as Wal-

Mart and Target continue to build stores and expand their selling space.

COMPANY VIEW

A statement by John Eyler, chairman, president and CEO of Toys”R”Us, follows. This

has been taken from the companys 2003 Annual Report:

The Toys “R “Us Inc.portfolio of businesses experienced both significant

disappointments and important successes in fiscal 2003.Our domestic Toys “R “Us

and Kids “R ” divisions Us faced considerable challenges and generated earnings

results well below fiscal 2002 on an operating basis.By contrast,we enjoyed record

sales and earnings performances from Babies “R “Us,Toys “R “Us International,and

Toysrus.com.In addition,operating disciplines continued to improve,highlighted by

solid inventory and expense control as well as the completion of a three-year plan to

refinance our debt and strengthen our balance sheet.

season of renewed growth for the toy industry.

Company View

Our portfolio also experienced a number of important successes in 2003.Toys “R “Us

International turned in another record year,and we grew our market share in virtually

all of our international markets.Sales increased in local currencies,and these gains

were enhanced by the impact of currency translation.

Once we have gathered all necessary valuations and other relevant information, we

will review potential strategic alternatives and make our recommendations to the

Board of Directors. The strength of our current financial position and liquidity put us in

an excellent position to evaluate, and then implement ,the best course of action to

enhance shareholder value. At the same time, we will work diligently to make sure

that the interests of our debt holders, vendors, and associates are also appropriately

taken into account.

In conclusion

As fiscal year 2004 progresses, we are committed to operating our portfolio of

businesses successfully and to completing the strategic review that will define the

future of Toys “R “Us,Inc. I am proud to be a part of the “R “Us family and these great

brands, and I would like to thank all of you for your continued confidence in Toys “R

“Us,Inc. and for the vital role you play in our success.

WORKING CAPITAL ANALYSIS (3-YEARS):

200220032004

Current Assets$2,631,000,000$3,560,000,000$4,684,000,000

Current Liabilities..$2,000,000,000 $2,378,000,000$2,772,000,000

——————————————————————

Working Capital.. $631,000,000 $1,192,000,000$1,913,000,000

ALTMAN Z-SCORE ANALYSIS (3-YEARS): Using Z-score formula at http://www.jaxworks.com:

200220032004

ALTMAN Z-SCORE.. 1.93431.93221.8233

Z-SCORE ABOVE 2.99–YOU’RE IN GOOD SHAPE

Z-SCORE BETWEEN 2.99 and 1.81–WARNING SIGNS

Z-SCORE BELOW 1.81–BIG TROUBLE–COULD BE HEADING TOWARD BANKRUPTCY

CONCLUSION AND RECOMMENDATIONS

The liquidity ratios show an increase in the current and acid-test (quick) ratios during the last three years. This coincides with an increasing/stockpiling of inventory and an increase in short-term debt which is detrimental to Toys R Us immediate debt paying ability. The Debt to Equity ratio is within the industry average which is welcome news to long-term creditor but unwelcome to common stockholders because they benefit from assets provided by creditors. The asset utilization ratios (Account receivable, Inventory turnover, Total asset turnover, etc) are all increasing which is a positive. However, the companys turnover ratios are much slower than the industry average which indicates too many obsolete goods on hand and/or overstocked inventory. The Gross margin ratio is much lower than the industry average which indicates managements inability to control productions costs and a lower measure of profitability. The debt utilization ratios

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