The Toys ‘R’ Us board finally awoke from a deep five year slumber when one of their members suddenly came to and was heard to shout: “Dude, Where’s My Company?” The Dude had spent the last year building a mega million dollar headquarters, buying pricey Stargates and awarding himself 5 million dollar bonuses while Walmart ate all of his lunch and a large portion of his dinner too. This is the second toy retailing institution that…Well, you know. None of this was able to rouse the board and they seem still to be a bit drowsy because The Dude is still around although we suspect that he’s no longer really at the helm. (Step up Mr. G.)
At this time, it’s difficult to say exactly how this will affect toy manufacturers, except that it won’t be good, because TRU has not provided very complete information and isn’t answering any questions. Looking back over the last five years perhaps we shouldn’t assume that they know what they’re going to do at all.
It appears that the board, The Dude and several senior executives are going to jump ship and hop into the much smaller but much healthier lifeboat of Babies ‘R’ Us. How the separation will be achieved is pretty much open to speculation. Speculation at the expense of others can be a fun and stimulating pastime and so we’ll give it a go.
First, it seems fairly certain that TRU will shutter a significant number of unprofitable stores (100+) and either sell off the real estate or sell off long term low rent leases similar to what K-Mart recently did. This would be a smart move and could raise significant capital. The question is what will they do with the cash? They could return it to shareholders – not very likely. Since it is toy stores being sold they could give it to the remaining toy division to patch up and rebuild. Perhaps, but I suspect that the toy division will mainly end up being recapitalized by selling off its international unit. It could go to Babies ‘R’ Us along with the board, The Dude and the rest of the ship jumpers…hmm. Babies ‘R’ Us could use the loot to fuel a long term growth strategy or it’s also likely that they may need a brand spanking new mega million dollar headquarters and perhaps their own Stargate or two. As a registered cynic, I suspect that is where most of the money will go with just enough being given to the toy division to keep up appearances and satisfy the board’s liability insurance company.
The toy business could be sold to a strategic partner but I don’t think that they are exactly lining up and any strategic buyer would have to be so incredibly stupid that there would be very little chance that they could ever fix the damn thing. It could be spun off to shareholders. “Dear Shareholders, please accept this falling knife as a symbol of the esteem in which we hold you.”
What would seem to make the most sense would be for the toy business to be either taken private or sold to a private equity group. Without having to waste time, money and energy on the wacky growth strategies needed to please the equity investors who somehow never figured out that this was a mature business; a slimmed down, better operated toy division could be a real cash cow. In these uncertain times there is nothing wrong with cash. I like cash. Please send ME your cash.
A possible silver lining in all of this is that the toy division will be run by John Barbour who recently ran Toys ‘R’ Us International. John is a smart, honest, hardworking guy who very importantly has spent most of his career on the manufacturers side. Hopefully, this might mean he will be more willing to “partner” with his vendors and less likely to pull the type of crap that Toys ‘R’ Us has become all too well known for over the last ten years. This idea should be tempered though with the knowledge that Mr. Barbour will be performing emergency surgery and has an extremely tough job ahead of him (note: Mr. Markee opted to hop into the lifeboat.)
In the very short term our eyes are riveted on the words: “150 million dollars in writedowns.” Toys ‘R’ Us is genetically incapable of swallowing this type of a thing and vendors had better watch out. The company’s long term motto for vendors – “When we suck, you pay!” will certainly be in force.
How does all this affect toy industry hiring? Hiring has continued to be robust through July. In fact, at Toyjobs, July was our best single month in twenty three years of practice. Most of this can be attributed to closing out searches which began in May and June. New search starts in July slowed due to the usual seasonal fluctuations and the same appears to be happening in early August.
For the year, toy industry hiring has been way up with the exception of Mattel which seems to be desperately trying to manage earnings through layoffs rather than growth. The economy has turned the corner, although as I’ve said before, the toy industry uptick has been much more muted. This is likely because the industry’s problems are not caused by consumer demand but by retailers. These troubles will continue until someone devises a new method if distribution which lessens dependence on Walmart, Toys ‘R’ Us and the like. So far, I’m not smart enough to figure that out, but hopefully someone will be. In the meantime, toy companies have been running so lean over the last couple of years, that even a modest upturn have left manufacturers scrambling to get the work done and every company seems to need a couple of extra pairs of hands.
Up until last week’s news, I was predicting that the summer recruiting slowdown would end in late August as it usually does and that hiring would be strong through the end of the year. The TRU news throws a new uncertainty into the mix and I suspect that until there is more explicit information that toy companies will temporarily act like deer staring into headlights until they can figure out how all this affects them. Ultimately, Walmart and Target will come a-knocking, looking for samples – faster, earlier, cheaper and with lots of changes and toy companies will be forced to hire people to get the job done.
While people are currently enjoying a slower, more relaxing summer pace; the combination of last weeks news and the fact that October Toy Fair is not as far away as it looks has prompted us to include the following article as a public service. It provides some techniques purported to help us each to reduce stress in the workplace (toy business? stressful?).
Will they work? I don’t know yet but I’m going to start practicing now. By the time the September ramp up rolls around it will be way too late.
All the best,
Tom Keoughan
