I have quite a few very fond memories of Toys R Us.
My Aunt and Uncle would come visit us and part of the ritual was to take my sister and me there and we got one toy each, under a certain budget. I typically got Muscle Men or GI Joe.
I can still smell that store in my mind...38 years later. And I can still visualize the GI Joe Aircraft Carrier that was holy unobtainium for me and my families budget.
All of this to say...I am thankful I never witnessed the fall. I hit an age where we stopped going and I just never went back.
bluedino 2 hours ago [-]
I remember the GI joe aisle, remote control car aisle, and of course the video game isle with the tickets you had to take up to the cage at the front of the store.
mjevans 4 hours ago [-]
The fall isn't covered in very much detail.
I think it might be exemplified by a personal example. I went to one near the end to buy a standard, wooden block, JENGA toy for relatives. They didn't have any in stock other than some crummy cardboard sticks version (absolutely unable to stand up to the abuse a child under 12 will dish out). I think I ended up ordering one from Amazon with Prime or hitting up a Target or something...
As for the 'category killer' thing, that's probably an example of Market Failure (regulation failure). For a fungible commodity product, there probably should be a requirement to provide access to the same price to all players in the market. That might mean that the price at a generic warehouse in one of the major shipping ports is that price. Stores / groups of stores would still need to leverage shipping and distribution networks, but it'd at least give places a _chance_ to compete.
jordanb 4 hours ago [-]
> they didn't have any in stock other than some crummy cardboard sticks version
Private Equity hates inventory. Their first trick in buying a retail business is slashing in-store inventory. They also treat suppliers like dogshit, playing games with payment terms, etc. End result: stores don't have the products customers want and quality suppliers fire them as customers.
ferguess_k 4 hours ago [-]
How do PEs earn money in this scenario? I don't think it can spin off the brand easily? Or by real estate?
toast0 3 hours ago [-]
So, some PEs do try to run businesses sustainably. But we mostly hear about the PEs that turn a business that's slowly dying to one that will operate "as normal" until it suddenly dies, usually somewhere around 5-7 years later.
The first thing is that, if at all possible, the PE wants to do a leveraged buyout where the acquired company itself has borrowed most of the funds to buy itself. This cashes out the previous investors, but leaves most of the risk with lenders rather than the PE firm. Sometimes the PE may get a cut of the financing revenue. Most of the loan will be sold on the bond market, typically as junk bonds. Junk bonds have high interest rates, because there's a good chance the loan won't be repaid, but maybe you'll collect enough between interest and the bankruptcy settlement.
While the company operates under the PE's management, it's getting paid management fees.
It's also likely to move valuable assets out of the company; for real estate, sale and leaseback is common; when the company implodes, the PE keeps the land and can sell or lease it to someone else. The sale price was probably under market and the lease over market, so the PE earns money here. Having a high lease payment helps the PE finance the purchase, and may help it finance similar property as well.
markus_zhang 3 hours ago [-]
Question is, why do lenders lend money to them? Maybe they can get the principles back somehow?
toast0 3 hours ago [-]
The interest rates are high, and the lenders likely will sell off the loans in a few years. If the company sticks around for a few years and looks ok, they might even be able to sell the loan for more than they lent out. Especially if the corporate numbers look good because of short-term changes, they may be able to get out.
When the company goes bankrupt, the lenders have first priority for remaining assets, sometimes lenders will takeover a business and run it away from the shore and earn a profit that way, too.
markus_zhang 2 hours ago [-]
Thanks, looks like interesting cases to study.
sct202 3 hours ago [-]
They got 13 years of payments which might have been enough to make it worth it for the lenders depending on the premium they were getting on loaning the money. Sears and Joann's also took about 13 years from buyout to bankruptcy. Party City only took 6 years.
chgs 2 hours ago [-]
Stick the junk bonds in. With solid bonds and hide that they exist. Sell to a greater fool.
ferguess_k 2 hours ago [-]
Thanks, I remember reading about those LBOs many years ago when they were kinda new to the public. Should have thought about that.
Guess the key is:
1) Find a suitable monetary situation
2) Find companies that still have long term value but are struggling
3) Find a loan
4) Execute
variaga 3 hours ago [-]
Private Equity playbook:
1) Buy a company from the stockholders by having the company take out loans (secured by future earnings) to pay for the stock. Do not pay for it with more than a token amount of your own money.
2) Slash company expenses in a way that generates short-term returns (but which normal companies don't do because it causes long term problems) like:
- don't buy new inventory to replace items sold (mentioned above)
- stop doing maintenance (saves money for a while, until everything breaks)
- delay paying outside vendors (works for a few months, until they stop shipping you stuff unless they get their money and/or sue you)
- sell physical assets (like the stores themselves) to an outside holding company (possibly owned by you) and rent them back, getting short term income for the company from the sale (but collecting the rent yourself, and also retaining the right to sell the real estate later).
3) pay yourself huge bonuses on the basis of your cost savings.
4) When the company is no longer viable, leave the empty husk behind. The company has a bunch of loans it will never be able to pay off (sucks for the lenders) but you keep your paychecks, bonuses and any assets you sold to yourself at below-market prices.
5) move on to the next company.
(basically, "the bust out" sequence from Goodfellas)
syedkarim 3 hours ago [-]
Who are the lenders and why do they keep lending when their is a history of default from the PE-owners?
dehrmann 2 hours ago [-]
GP is repeating the PE as corporate raiders story, but leaving out that these are often struggling, mismanaged companies, and that those loans have a sophisticated counterparty. The lenders might eat the losses, but after a few rounds, they'll demand higher interest rates once they see PE's turnaround track record. This is actually an example of where markets work; it's just ugly to see a beloved band go out like this.
variaga 2 hours ago [-]
I'm aware that some private equity actually does plan to make money by applying good management to a fundamentally sound company which is currently struggling (or "cheap") because of fixable mismanagement. Warren Buffet got rich by doing this repeatedly.
But that's not what happened to Toys'R'Us.
"Raider" PE doesn't care about the high interest rates because they don't intend to pay them for long enough to matter, and - as mentioned in other replies - usually the sophisticated counterparty to the loans has identified a less-sophisticated other counterparty to sell the loans to and sees this as a risk-free deal that nets them origination fees. Suckers exist. Banks make it their job to find them.
variaga 3 hours ago [-]
Commonly, the bank that undewrites the loans will essentially do the same thing - they collect a commission but sell the underlying debt to someone else as (high-yield, because they are high-risk) bonds.
If you've heard of "Junk Bonds", this is (one source) of where they come from.
It's like a financial game of "hot potato" - you can make money as long as you're not the last person to hold the debt. So the answer to "who lends the money?" is "anyone who thinks they can sell the debt to someone else before it explodes".
In the end, a lot of it goes to "unsophisticated" individual investors, who will buy it based on "Sears (or whoever) is a great company, why wouldn't I buy their bonds" without realizing the full extend of what's happening.
charlieyu1 3 hours ago [-]
Bankers who want to secure a deal that looks good on paper. When the loan defaults it would be someone else’s problem.
syntaxless 3 hours ago [-]
Ultimately it falls on the taxpayer. The existence of the FDIC not only incentivizes but almost forces banks to be risky with their investments. It doesn’t matter if their lending fails because the government has to come in and clean it all up and those expenses are passed on to the public.
dehrmann 2 hours ago [-]
Banks aren't defaulting because they held bad PE loans. The recent memorable case was SVB, but it held quality paper, just with a duration risk. Banks aren't investing depositor funds in loans to Toys R Us.
syntaxless 2 hours ago [-]
It’s not entirely about defaults.
ikiris 2 hours ago [-]
FDIC has exactly 0 to do with this.
syntaxless 2 hours ago [-]
Fractional reserve banking means the bank only has a small percentage of the money its customers deposit on hand (currently 0% since 2020). What do they do with the rest of that money? They invest it. They take on risky investments because it will either pay off or they will be bailed out by the taxpayer through FDIC. There is zero risk on the banks part.
ikiris 2 hours ago [-]
TLDR: you know how people will by crypto that has absolutely no backing of anything? Well these bonds at least back to the company. There's always another sucker there to unload your debt to after you make a profit in fees and interest.
m463 3 hours ago [-]
I vaguely recall they did a few rounds of this at bed, bath and beyond.
variaga 3 hours ago [-]
Also Sears
guelo 3 hours ago [-]
I've personally seen this script played out a couple times in my career similar to what you describe. But the piece I don't understand is the banks. The loans usually end up worthless since the future earnings evaporate, so why do bankers go along with it?
variaga 3 hours ago [-]
The banks know this is likely to happen, but believe (usually correctly) that they can sell the debt to someone else before it becomes worthless.
I.e. the deal for the bank is not "we're going to issue this loan and collect payments for it over the next 20 years", it's "we're going to issue $20M loans and simultaneously sell $21M of bonds backed by that loan. We skim the $1M difference for ourselves at basically no risk, and if the bonds default, they default. Not our problem."
Why do people buy the bonds?
- they think they can do the same thing - repackage the bonds as CDOs (collateralized debt obligations), skim a percentage and dump the risk on someone else. This possibly includes hiding the risk by combining multiple different kinds of debt, and then issuing different 'tranches' with different risk/reward levels. (this is what happened to a lot of mortgages in the 2008 financial crisis)
- they only plan to hold the bonds for a short time (the company will probably make the first few loan, and hence bond payments) and sell them to someone who's further removed from the original sale (who may have not done their due diligence) before things go badly
- they believe the private equity propaganda (propaganda works! at least sometimes) and actually think the bonds will be paid off.
markus_zhang 3 hours ago [-]
Maybe the bankers are thinking the same thing -- it's the bank that loses, not me who bagged huge bonus.
But then how does it pass banks's audit?
zdragnar 3 hours ago [-]
The bank doesn't keep the loan, they sell it off to someone else. This happens all the time with mortgages. The banks are constantly adjusting their portfolios to ensure a desired level of risk and leverage. If nothing else, they've collected the origination fee already, so even if they don't get much in the way of payments they still come out ahead.
markus_zhang 2 hours ago [-]
Ah thanks, this makes a lot of sense now.
rufus_foreman 3 hours ago [-]
>> by having the company take out loans
How does that work exactly though? Loans from whom? Lenders watch Goodfellas too. They know the game here. Oh, a private equity firm wants to take out loans on the future earnings of this company they just bought. That sounds like it must be very profitable! Let's call off our due diligence.
Said no lender ever.
filmgirlcw 4 hours ago [-]
Debt
thakoppno 2 hours ago [-]
In college I had the opportunity to ask the CEO how the company intended to compete with online retailers and he responded dispassionately, “with loyalty cards.”
adfm 3 hours ago [-]
There’s a special place in hell reserved for private equity firms. I hear it’s for sale.
gosub100 3 hours ago [-]
do you think that had PE not been involved, Toys would be the same as it was in 1991 [1]? Glass cases with RC cars and hovercraft? Glue-together models, Hot Wheels? The times change, even though I agree with you that PE sucks. Besides, if it were merely PE then wouldn't that create new opportunity for people to start their own local toystores? If it were merely PE then the market to buy toys would remain unchanged, wouldn't it?
Problem is PE stresses a company out such that they don't have runway to adapt. In the end, the consumer is still less well served by fewer choices and higher prices.
gosub100 2 hours ago [-]
if the market existed, then a new toy store would appear. I'm saying the market for what TRU provided had disappeared.
jtuple 5 minutes ago [-]
> I'm saying the market for what TRU provided had disappeared
The market still exists, doesn't it?
Kids still exist, kids still play with toys.
People simply buy toys from Amazon now, not TRU.
Just like people buy electronics from Amazon, not Best Buy/Circuit City.
And shoes from Amazon/Zappos, not Payless.
Seems like most retail markets still exist, they've just been cornered by the giant "Everything Store".
IMO, physical toy stores should be competitive to e-commerce with the right strategy. Simply going to the store could be an exciting adventure into itself, with higher fidelity discovery than a screen provides. Esp. post-COVID where people are opting more for analog/offline options after online/lockdown burnout.
Claiming TRU's market disappeared feels similar to claiming the bookstore market disappeared, yet Barnes and Noble had a well documented and surprising comeback by shifting strategy:
PE isn't trying to turn the company around in these cases, or at least only trying to do that; when the company is truly doomed PE is trying to maximize the value obtained before it expires. They're serving a useful role in the capitalist ecosystem.
minton 3 hours ago [-]
They had electronics and legos, not just models and hot wheels. I think they’d have adapted like most businesses have.
gosub100 2 hours ago [-]
I think they didn't adapt and thats why they no longer exist
fknorangesite 4 minutes ago [-]
You're factually wrong, as described in the linked case study and a million other similar ones - whether they're about Toys R Us specifically or otherwise.
Toys R Us still exists where I live (Canada). I admit I don't go in often outside of holiday shopping, but it's still the same Toys R Us it's always been, natural shifts in toy inventory notwithstanding, of course.
I'm not sure why you're riding for the predatory PE firms, here. "That's why they don't exist"? My brother in Christ, they still do - and still would if it weren't for this aggressive bullshit.
sulam 2 hours ago [-]
Or they could have been Barnes & Noble.
emkoemko 3 hours ago [-]
we still have these stores in Canada, where they not the same business? https://www.toysrus.ca
toast0 2 hours ago [-]
Wikipedia says the Canadian company was owned by the US company until its bankruptcy, when the Canadian company was sold. Very likely, it had operated with separate finances from the US parent, and didn't have the same sort of loans and extraction activities. So when the US firm went bankrupt, there was interest from multiple bidders for the Canadian assets.
emkoemko 2 hours ago [-]
oh that makes sense
dannyphantom 2 hours ago [-]
They used to be connected; it was split in ~2017(ish) with the Canadian division having been bought while the US stores closed all locations. Doug Putman bought it in 2021 and I saw an article about 3 or 4 months ago that Putman took on ~$120M in debt financing to scale out the org.
sepositus 2 hours ago [-]
That 1996 picture brings huge nostalgia for me. I still remember being an excited 11-year-old carrying my Pokémon badge book on Saturday, ready to compete in the TCG championship.
devrandoom 2 hours ago [-]
I personally stopped shopping with them because they stopped selling toys and sold only crappy expensive garbage.
Rendered at 02:23:09 GMT+0000 (Coordinated Universal Time) with Vercel.
My Aunt and Uncle would come visit us and part of the ritual was to take my sister and me there and we got one toy each, under a certain budget. I typically got Muscle Men or GI Joe.
I can still smell that store in my mind...38 years later. And I can still visualize the GI Joe Aircraft Carrier that was holy unobtainium for me and my families budget.
All of this to say...I am thankful I never witnessed the fall. I hit an age where we stopped going and I just never went back.
I think it might be exemplified by a personal example. I went to one near the end to buy a standard, wooden block, JENGA toy for relatives. They didn't have any in stock other than some crummy cardboard sticks version (absolutely unable to stand up to the abuse a child under 12 will dish out). I think I ended up ordering one from Amazon with Prime or hitting up a Target or something...
As for the 'category killer' thing, that's probably an example of Market Failure (regulation failure). For a fungible commodity product, there probably should be a requirement to provide access to the same price to all players in the market. That might mean that the price at a generic warehouse in one of the major shipping ports is that price. Stores / groups of stores would still need to leverage shipping and distribution networks, but it'd at least give places a _chance_ to compete.
Private Equity hates inventory. Their first trick in buying a retail business is slashing in-store inventory. They also treat suppliers like dogshit, playing games with payment terms, etc. End result: stores don't have the products customers want and quality suppliers fire them as customers.
The first thing is that, if at all possible, the PE wants to do a leveraged buyout where the acquired company itself has borrowed most of the funds to buy itself. This cashes out the previous investors, but leaves most of the risk with lenders rather than the PE firm. Sometimes the PE may get a cut of the financing revenue. Most of the loan will be sold on the bond market, typically as junk bonds. Junk bonds have high interest rates, because there's a good chance the loan won't be repaid, but maybe you'll collect enough between interest and the bankruptcy settlement.
While the company operates under the PE's management, it's getting paid management fees.
It's also likely to move valuable assets out of the company; for real estate, sale and leaseback is common; when the company implodes, the PE keeps the land and can sell or lease it to someone else. The sale price was probably under market and the lease over market, so the PE earns money here. Having a high lease payment helps the PE finance the purchase, and may help it finance similar property as well.
When the company goes bankrupt, the lenders have first priority for remaining assets, sometimes lenders will takeover a business and run it away from the shore and earn a profit that way, too.
Guess the key is:
1) Find a suitable monetary situation
2) Find companies that still have long term value but are struggling
3) Find a loan
4) Execute
1) Buy a company from the stockholders by having the company take out loans (secured by future earnings) to pay for the stock. Do not pay for it with more than a token amount of your own money.
2) Slash company expenses in a way that generates short-term returns (but which normal companies don't do because it causes long term problems) like:
- don't buy new inventory to replace items sold (mentioned above)
- stop doing maintenance (saves money for a while, until everything breaks)
- delay paying outside vendors (works for a few months, until they stop shipping you stuff unless they get their money and/or sue you)
- sell physical assets (like the stores themselves) to an outside holding company (possibly owned by you) and rent them back, getting short term income for the company from the sale (but collecting the rent yourself, and also retaining the right to sell the real estate later).
3) pay yourself huge bonuses on the basis of your cost savings.
4) When the company is no longer viable, leave the empty husk behind. The company has a bunch of loans it will never be able to pay off (sucks for the lenders) but you keep your paychecks, bonuses and any assets you sold to yourself at below-market prices.
5) move on to the next company.
(basically, "the bust out" sequence from Goodfellas)
But that's not what happened to Toys'R'Us.
"Raider" PE doesn't care about the high interest rates because they don't intend to pay them for long enough to matter, and - as mentioned in other replies - usually the sophisticated counterparty to the loans has identified a less-sophisticated other counterparty to sell the loans to and sees this as a risk-free deal that nets them origination fees. Suckers exist. Banks make it their job to find them.
If you've heard of "Junk Bonds", this is (one source) of where they come from.
It's like a financial game of "hot potato" - you can make money as long as you're not the last person to hold the debt. So the answer to "who lends the money?" is "anyone who thinks they can sell the debt to someone else before it explodes".
In the end, a lot of it goes to "unsophisticated" individual investors, who will buy it based on "Sears (or whoever) is a great company, why wouldn't I buy their bonds" without realizing the full extend of what's happening.
I.e. the deal for the bank is not "we're going to issue this loan and collect payments for it over the next 20 years", it's "we're going to issue $20M loans and simultaneously sell $21M of bonds backed by that loan. We skim the $1M difference for ourselves at basically no risk, and if the bonds default, they default. Not our problem."
Why do people buy the bonds?
- they think they can do the same thing - repackage the bonds as CDOs (collateralized debt obligations), skim a percentage and dump the risk on someone else. This possibly includes hiding the risk by combining multiple different kinds of debt, and then issuing different 'tranches' with different risk/reward levels. (this is what happened to a lot of mortgages in the 2008 financial crisis)
- they only plan to hold the bonds for a short time (the company will probably make the first few loan, and hence bond payments) and sell them to someone who's further removed from the original sale (who may have not done their due diligence) before things go badly
- they believe the private equity propaganda (propaganda works! at least sometimes) and actually think the bonds will be paid off.
But then how does it pass banks's audit?
How does that work exactly though? Loans from whom? Lenders watch Goodfellas too. They know the game here. Oh, a private equity firm wants to take out loans on the future earnings of this company they just bought. That sounds like it must be very profitable! Let's call off our due diligence.
Said no lender ever.
1. https://youtu.be/KsebX5Gd2Ao?si=YPbNBW_Xw3dHmcQw
The market still exists, doesn't it?
Kids still exist, kids still play with toys.
People simply buy toys from Amazon now, not TRU.
Just like people buy electronics from Amazon, not Best Buy/Circuit City.
And shoes from Amazon/Zappos, not Payless.
Seems like most retail markets still exist, they've just been cornered by the giant "Everything Store".
IMO, physical toy stores should be competitive to e-commerce with the right strategy. Simply going to the store could be an exciting adventure into itself, with higher fidelity discovery than a screen provides. Esp. post-COVID where people are opting more for analog/offline options after online/lockdown burnout.
Claiming TRU's market disappeared feels similar to claiming the bookstore market disappeared, yet Barnes and Noble had a well documented and surprising comeback by shifting strategy:
https://news.ycombinator.com/item?id=34165960
Toys R Us still exists where I live (Canada). I admit I don't go in often outside of holiday shopping, but it's still the same Toys R Us it's always been, natural shifts in toy inventory notwithstanding, of course.
I'm not sure why you're riding for the predatory PE firms, here. "That's why they don't exist"? My brother in Christ, they still do - and still would if it weren't for this aggressive bullshit.