Toys"R"Us, Inc. Reports Results For Third Quarter 2016

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

13 Weeks Ended

39 Weeks Ended

(In millions)

October 29,
 2016

October 31,
 2015

October 29,
 2016

October 31,
 2015

Net sales

$

2,278

$

2,331

$

6,879

$

6,949

Cost of sales

1,457

1,499

4,350

4,380

Gross margin

821

832

2,529

2,569

Selling, general and administrative expenses

835

827

2,423

2,450

Depreciation and amortization

76

80

240

253

Other income, net

(59)

(21)

(114)

(65)

Total operating expenses

852

886

2,549

2,638

Operating loss

(31)

(54)

(20)

(69)

Interest expense

(122)

(113)

(347)

(333)

Interest income

1

1

2

2

Loss before income taxes

(152)

(166)

(365)

(400)

Income tax expense

3

—

8

2

Net loss

(155)

(166)

(373)

(402)

Less: Net earnings attributable to noncontrolling interest

1

1

4

4

Net loss attributable to Toys "R" Us, Inc.

$

(156)

$

(167)

$

(377)

$

(406)

(In millions)

October 29,
 2016

January 30,
 2016

October 31,
 2015

ASSETS

Current Assets:

Cash and cash equivalents

$

420

$

680

$

396

Accounts and other receivables

301

225

266

Merchandise inventories

3,472

2,270

3,318

Current deferred tax assets

—

—

40

Prepaid expenses and other current assets

135

113

158

Total current assets

4,328

3,288

4,178

Property and equipment, net

3,074

3,163

3,206

Goodwill

64

64

64

Deferred tax assets

99

96

129

Restricted cash

49

52

53

Other assets

252

247

251

Total Assets

$

7,866

$

6,910

$

7,881

LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' DEFICIT

Current Liabilities:

Accounts payable

$

2,107

$

1,699

$

2,089

Accrued expenses and other current liabilities

950

994

932

Income taxes payable

33

32

30

Current portion of long-term debt

70

73

204

Total current liabilities

3,160

2,798

3,255

Long-term debt

5,493

4,612

5,356

Deferred tax liabilities

79

64

112

Deferred rent liabilities

341

345

344

Other non-current liabilities

260

245

268

Temporary equity

119

111

85

Total stockholders' deficit

(1,586)

(1,265)

(1,539)

Total Liabilities, Temporary Equity and Stockholders' Deficit

$

7,866

$

6,910

$

7,881

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

39 Weeks Ended

(In millions)

October 29,
 2016

October 31,
 2015

Cash Flows from Operating Activities:

Net loss

$

(373)

$

(402)

Adjustments to reconcile Net loss to Net cash used in operating activities:

Depreciation and amortization

240

253

Amortization and write-off of debt issuance costs and debt discount

25

32

Gains on sales of assets

(45)

(8)

Deferred income taxes

6

2

Unrealized (gains) losses on foreign exchange

(6)

3

Other

14

5

Changes in operating assets and liabilities:

Accounts and other receivables

(25)

(6)

Merchandise inventories

(1,188)

(1,275)

Prepaid expenses and other operating assets

(38)

(24)

Accounts payable, Accrued expenses and other liabilities

358

449

Income taxes payable, net

(28)

(26)

Net cash used in operating activities

(1,060)

(997)

Cash Flows from Investing Activities:

Capital expenditures

(174)

(139)

Proceeds from sales of assets

47

12

Increase in restricted cash

(1)

—

Acquisitions

—

(2)

Net cash used in investing activities

(128)

(129)

Cash Flows from Financing Activities:

Long-term debt borrowings

1,777

1,150

Long-term debt repayments

(852)

(325)

Short-term debt borrowings, net

7

8

Capitalized debt issuance costs

(10)

(2)

Distribution to noncontrolling interest

(12)

—

Net cash provided by financing activities

910

831

Effect of exchange rate changes on Cash and cash equivalents

18

(7)

Cash and cash equivalents:

Net decrease during period

(260)

(302)

Cash and cash equivalents at beginning of period

680

698

Cash and cash equivalents at end of period

$

420

$

396

OPERATING METRICS

(Unaudited)

13 Weeks Ended

39 Weeks Ended

October 29,
 2016

October 31,
 2015

October 29,
 2016

October 31,
 2015

Domestic Segment:

Operating Data

Gross margin as a percentage of net sales

34.0

%

34.0

%

35.0

%

35.4

%

Same store sales

(1.9)

%

(0.9)

%

(0.6)

%

(1.8)

%

Change in number of transactions

(3.0)

%

(1.9)

%

(1.4)

%

(3.4)

%

Change in average basket size

1.1

%

1.0

%

0.8

%

1.6

%

Net Sales by Product Category

Baby

46.1

%

46.2

%

46.7

%

46.8

%

Core Toy

16.6

%

15.7

%

14.8

%

14.1

%

Entertainment

4.7

%

6.5

%

5.1

%

6.5

%

Learning

21.4

%

20.4

%

19.0

%

18.6

%

Seasonal

10.8

%

10.4

%

13.9

%

13.1

%

Other (1)

0.4

%

0.8

%

0.5

%

0.9

%

Total

100

%

100

%

100

%

100

%

International Segment:

Operating Data

Gross margin as a percentage of net sales

39.0

%

38.2

%

39.6

%

39.5

%

Same store sales (2)

(2.5)

%

2.9

%

0.3

%

2.5

%

Change in number of transactions

(3.8)

%

(3.6)

%

(2.1)

%

(1.8)

%

Change in average basket size (2)

1.3

%

6.5

%

2.4

%

4.3

%

Net Sales by Product Category

Baby

26.1

%

25.0

%

26.5

%

25.6

%

Core Toy

22.2

%

22.2

%

21.0

%

21.0

%

Entertainment

4.8

%

6.3

%

5.0

%

6.1

%

Learning

31.0

%

31.2

%

29.1

%

28.7

%

Seasonal

15.0

%

14.5

%

17.5

%

17.7

%

Other (3)

0.9

%

0.8

%

0.9

%

0.9

%

Total

100

%

100

%

100

%

100

%

Consolidated:

Operating Data

Gross margin as a percentage of net sales

36.0

%

35.7

%

36.8

%

37.0

%

Same store sales (2)

(2.1)

%

0.6

%

(0.3)

%

(0.1)

%

Change in number of transactions

(3.4)

%

(2.8)

%

(1.7)

%

(2.7)

%

Change in average basket size (2)

1.3

%

3.4

%

1.4

%

2.6

%

(1)

Consists primarily of non-product related revenues.

(2)

Excludes the impact of foreign currency translation.

(3)

Consists primarily of non-product related revenues, including licensing revenue from unaffiliated third parties.

Non-GAAP Disclosure of EBITDA and 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.

Reconciliation of Net loss attributable to Toys "R" Us, Inc. to EBITDA and Adjusted EBITDA is as follows:

13 Weeks Ended

39 Weeks Ended

LTM

(In millions)

October 29,
 2016

October 31,
 2015

October 29,
 2016

October 31,
 2015

October 29,
 2016

October 31,
 2015

Net loss attributable to Toys "R" Us, Inc.

$

(156)

$

(167)

$

(377)

$

(406)

$

(101)

$

(141)

Add:

Income tax expense

3

—

8

2

82

41

Interest expense, net

121

112

345

331

440

442

Depreciation and amortization

76

80

240

253

330

345

EBITDA

44

25

216

180

751

687

Adjustments:

Compensation expense (a)

6

2

20

13

31

20

Certain transaction costs (b)

5

—

15

2

26

(1)

Foreign currency re-measurement (c)

4

—

(5)

3

3

18

Sponsors' management and advisory fees (d)

2

1

5

6

5

10

Severance

2

6

5

19

10

20

Impairment of long-lived assets

2

—

3

4

15

9

Net earnings attributable to noncontrolling interest

1

1

4

4

6

6

Net gains on sales (e)

(45)

(1)

(45)

(8)

(57)

(8)

Litigation (f)

—

—

4

(1)

4

(9)

Property losses, net of insurance recoveries (g)

—

(1)

(1)

(1)

(1)

(1)

Store closure costs (h)

—

1

—

5

2

4

Adjusted EBITDA (i)

$

21

$

34

$

221

$

226

$

795

$

755

A reconciliation of Net (loss) earnings to EBITDA and Adjusted EBITDA for Toys "R" Us-Delaware, Inc. is as follows:

13 Weeks Ended

39 Weeks Ended

LTM

(In millions)

October 29,
 2016

October 31,
 2015

October 29,
 2016

October 31,
 2015

October 29,
 2016

October 31,
 2015

Net (loss) earnings

$

(83)

$

(110)

$

(198)

$

(245)

$

32

$

(64)

Add:

Income tax expense

4

3

13

7

33

10

Interest expense, net

36

40

117

126

147

173

Depreciation and amortization

47

52

151

167

209

227

EBITDA

4

(15)

83

55

421

346

Adjustments:

Compensation expense (a)

—

(3)

2

(1)

3

2

Certain transaction costs (b)

5

—

13

—

20

(3)

Foreign currency re-measurement (c)

4

—

(5)

3

3

18

Sponsors' management and advisory fees (d)

2

1

5

5

6

9

Severance

2

3

3

11

6

11

Impairment of long-lived assets

—

—

1

2

1

3

Net gains on sales (e)

(45)

(1)

(45)

(1)

(45)

(1)

Litigation (f)

—

—

—

—

—

(8)

Property losses, net of insurance recoveries (g)

—

(1)

—

(1)

—

(1)

Store closure costs (h)

—

1

7

8

9

18

Adjusted EBITDA (i)

$

(28)

$

(15)

$

64

$

81

$

424

$

394

(a)

Represents the incremental compensation expense related to certain one-time awards and modifications, net of forfeitures of certain officers' awards.

(b)

Represents expenses associated with the transition of our U.S. e-commerce operations and other transaction costs.

(c)

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

(d)

Represents the fees expensed to our Sponsors in accordance with the advisory agreement.

(e)

Represents sales of properties and intellectual property.

(f)

Represents certain litigation expenses and settlements recorded for legal matters.

(g)

Represents property losses and insurance claims recognized.

(h)

Represents store closure costs, net of lease surrender income.

(i)

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, severance, impact of litigation, store closure costs, noncontrolling interest, net gains on sales 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.