Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2017
Commission file number 1-11609
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11652656&doc=12
TOYS “R” US, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________________ 
Delaware
 
22-3260693
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
One Geoffrey Way Wayne, New Jersey
 
07470
(Address of principal executive offices)
 
(Zip code)
(973) 617-3500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  ¨
(Note: As a voluntary filer not subject to the filing requirements of Section 13(a) or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13(a) or 15(d) of the Exchange Act during the preceding 12 months as if the registrant were subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ¨    No  x
As of June 7, 2017, there were 49,353,943 outstanding shares of common stock of Toys “R” Us, Inc., none of which were publicly traded.
 




TOYS “R” US, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
PAGE
 
 
 




PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

TOYS “R” US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In millions)
 
April 29,
2017
 
January 28,
2017
 
April 30,
2016
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
301

 
$
566

 
$
458

Accounts and other receivables
 
229

 
255

 
249

Merchandise inventories
 
2,429

 
2,476

 
2,433

Prepaid expenses and other current assets
 
132

 
92

 
144

Total current assets
 
3,091

 
3,389

 
3,284

Property and equipment, net
 
3,030

 
3,067

 
3,163

Goodwill
 
64

 
64

 
64

Deferred tax assets
 
130

 
129

 
104

Restricted cash
 
56

 
54

 
54

Other assets
 
201

 
205

 
255

Total Assets
 
$
6,572

 
$
6,908

 
$
6,924

 
 
 
 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
 
 
 
 
 
 
Accounts payable
 
$
1,204

 
$
1,695

 
$
1,352

Accrued expenses and other current liabilities
 
759

 
897

 
817

Income taxes payable
 
20

 
27

 
33

Current portion of long-term debt
 
163

 
119

 
83

Total current liabilities
 
2,146

 
2,738

 
2,285

Long-term debt
 
5,049

 
4,642

 
5,185

Deferred tax liabilities
 
77

 
75

 
64

Deferred rent liabilities
 
342

 
342

 
347

Other non-current liabilities
 
277

 
271

 
265

Temporary equity
 

 
132

 
119

Total stockholders’ deficit
 
(1,319
)
 
(1,292
)
 
(1,341
)
Total Liabilities, Temporary Equity and Stockholders’ Deficit
 
$
6,572

 
$
6,908

 
$
6,924

See Notes to the Condensed Consolidated Financial Statements.

1



TOYS “R” US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

  
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
Net sales
 
$
2,206

 
$
2,319

Cost of sales
 
1,423

 
1,473

Gross margin
 
783

 
846

Selling, general and administrative expenses
 
779

 
805

Depreciation and amortization
 
75


80

Other income, net
 
(17
)
 
(32
)
Total operating expenses
 
837

 
853

Operating loss
 
(54
)
 
(7
)
Interest expense
 
(107
)
 
(123
)
Interest income
 
1

 
1

Loss before income taxes
 
(160
)
 
(129
)
Income tax expense (benefit)
 
3

 
(4
)
Net loss
 
(163
)

(125
)
Less: Net earnings attributable to noncontrolling interest
 
1

 
1

Net loss attributable to Toys “R” Us, Inc.
 
$
(164
)
 
$
(126
)
See Notes to the Condensed Consolidated Financial Statements.

2



TOYS “R” US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
Net loss
 
$
(163
)
 
$
(125
)
Other comprehensive income, net of tax
 
 
 
 
Foreign currency translation adjustments
 
4

 
68

Unrealized actuarial losses
 
(1
)
 

Unrealized loss on hedged transactions
 
(1
)
 

Total other comprehensive income, net of tax
 
2

 
68

Comprehensive loss, net of tax
 
(161
)
 
(57
)
Less: Comprehensive income attributable to noncontrolling interest
 
1

 
1

Comprehensive loss attributable to Toys “R” Us, Inc.
 
$
(162
)
 
$
(58
)
See Notes to the Condensed Consolidated Financial Statements.


3



TOYS “R” US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
Cash Flows from Operating Activities:
 
 
 
 
Net loss
 
$
(163
)
 
$
(125
)
Adjustments to reconcile Net loss to Net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
75

 
80

Amortization and write-off of debt issuance costs and debt discount
 
9

 
9

Deferred income taxes
 
2

 
2

Unrealized losses (gains) on foreign exchange
 
5

 
(13
)
Other
 
3

 
16

Changes in operating assets and liabilities:
 
 
 
 
Accounts and other receivables
 
36

 
7

Merchandise inventories
 
56

 
(101
)
Prepaid expenses and other operating assets
 
(37
)
 
(21
)
Accounts payable, Accrued expenses and other liabilities
 
(629
)
 
(576
)
Income taxes payable, net
 
(14
)
 
(22
)
Net cash used in operating activities
 
(657
)

(744
)
Cash Flows from Investing Activities:
 
 
 
 
Capital expenditures
 
(39
)
 
(50
)
Proceeds from sales of assets
 

 
2

Increase in restricted cash
 
(1
)
 

Net cash used in investing activities
 
(40
)
 
(48
)
Cash Flows from Financing Activities:
 
 
 
 
Long-term debt borrowings
 
554

 
563

Long-term debt repayments
 
(130
)
 
(9
)
Short-term debt borrowings, net
 
4

 
5

Capitalized debt issuance costs
 

 
(1
)
Distribution to noncontrolling interest
 

 
(12
)
Net cash provided by financing activities
 
428

 
546

Effect of exchange rate changes on Cash and cash equivalents
 
4

 
24

Cash and cash equivalents:
 
 
 
 
Net decrease during period
 
(265
)
 
(222
)
Cash and cash equivalents at beginning of period
 
566

 
680

Cash and cash equivalents at end of period
 
$
301

 
$
458

See Notes to the Condensed Consolidated Financial Statements.

4



TOYS “R” US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)

  
 
Toys “R” Us, Inc. Stockholders
 
 
 
 
  
 
Common Stock (1)
 
Additional
Paid-in
Capital
 
Total
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Deficit
 
Noncontrolling Interest
 
Total Deficit
(In millions)
 
Issued
Shares
 
Treasury
Amount
 
Balance, January 30, 2016
 
49

 
$

 
$
67

 
$
(1,062
)
 
$
(270
)
 
$
(1,265
)
 
$

 
$
(1,265
)
Net loss attributable to Toys “R” Us, Inc.
 

 

 

 
(126
)
 

 
(126
)
 

 
(126
)
Total other comprehensive income, net of tax
 

 

 

 

 
68

 
68

 

 
68

Stock compensation expense
 

 

 
1

 

 

 
1

 

 
1

Adjustment of noncontrolling interest to redemption value
 

 

 

 
(19
)
 

 
(19
)
 

 
(19
)
Balance, April 30, 2016
 
49

 
$

 
$
68

 
$
(1,207
)
 
$
(202
)
 
$
(1,341
)
 
$

 
$
(1,341
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 28, 2017
 
49

 
$

 
$
72

 
$
(1,124
)
 
$
(240
)
 
$
(1,292
)
 
$

 
$
(1,292
)
Net (loss) earnings
 

 

 

 
(164
)
 

 
(164
)
 
1

 
(163
)
Total other comprehensive income, net of tax
 

 

 

 

 
2

 
2

 

 
2

Stock compensation expense
 

 

 
2

 

 

 
2

 

 
2

Reclassification from Temporary Equity
 

 

 

 

 

 

 
132

 
132

Adjustment of noncontrolling interest
 

 

 

 
68

 

 
68

 
(68
)
 

Balance, April 29, 2017
 
49

 
$

 
$
74

 
$
(1,220
)
 
$
(238
)
 
$
(1,384
)
 
$
65

 
$
(1,319
)
(1)
For all periods presented, the par value amount of Common Stock issued is less than $1 million. The number of Common Stock shares in treasury is also less than 1 million.
See Notes to the Condensed Consolidated Financial Statements.

5



TOYS “R” US, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of presentation
As used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us, Inc., and its consolidated subsidiaries, except as expressly indicated or unless the context otherwise requires. The Condensed Consolidated Balance Sheets as of April 29, 2017, January 28, 2017 and April 30, 2016, the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit for the thirteen weeks ended April 29, 2017 and April 30, 2016, have been prepared by us in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting, and in accordance with the requirements of this Quarterly Report on Form 10-Q. 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 weeks then ended. The Condensed Consolidated Balance Sheet at January 28, 2017, presented herein, has been derived from our audited balance sheet included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, 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 within our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. The results of operations for the thirteen weeks ended April 29, 2017 and April 30, 2016 are not necessarily indicative of operating results for the full year.
Toys-Japan/Asia JV Transaction
On March 24, 2017, the Company combined the legal entity structure for its Toys-Japan and Toys (Labuan) Holding Limited (“Asia JV”) businesses (the “Asia Merger”). The combination was effected by the issuance of new shares of the Asia JV in exchange for our contribution of Toys-Japan, which resulted in Fung Retailing’s ownership of 15% in the combined company and our ownership of 85% in the combined company. In connection with the Asia Merger, we no longer hold a future option or requirement to acquire Fung Retailing’s ownership interest in the Asia JV. As a result, the Noncontrolling interest is no longer redeemable at the option of the holder and was reclassified from Temporary equity to Stockholders’ deficit on the Condensed Consolidated Balance Sheet in fiscal 2017. We recorded a $68 million adjustment to Noncontrolling interest to reflect Fung Retailing’s ownership of the combined company’s net assets at book value.


6



2. Short-term borrowings and long-term debt
A summary of the Company’s consolidated Short-term borrowings and Long-term debt as of April 29, 2017January 28, 2017 and April 30, 2016 is outlined in the table below:
(In millions)
 
April 29,
2017
 
January 28,
2017
 
April 30,
2016
 Short-term borrowings
 
 
 
 
 
 
 Asia JV uncommitted lines of credit
 
$
4

 
$

 
$
5

 Long-term debt
 
 
 
 
 
 
 10.375% senior notes, due fiscal 2017 (1)
 

 

 
444

 Toys-Japan unsecured credit lines, expire fiscals 2017-2018
 

 

 
6

 8.500% senior secured notes, due fiscal 2017 (2)
 

 

 
717

 French real estate credit facility, due fiscal 2018
 
49

 
48

 
51

 Incremental secured term loan facility, due fiscal 2018 (3)
 
124

 
125

 
128

 Second incremental secured term loan facility, due fiscal 2018 (3)
 
62

 
62

 
64

 7.375% senior notes, due fiscal 2018 (1)
 
209

 
209

 
401

 $1.85 billion secured revolving credit facility, expires fiscal 2019 (3)
 
861

 
465

 
586

 Senior unsecured term loan facility, due fiscal 2019 (4)
 
875

 
874

 
912

 Tranche A-1 loan facility, due fiscal 2019 (3)
 
273

 
272

 
270

 Propco II mortgage loan, due fiscal 2019 (2)
 
488

 
489

 

 Giraffe Junior mezzanine loan, due fiscal 2019 (5)
 
73

 
78

 

 Secured term B-4 loan facility, due fiscal 2020 (3)
 
981

 
982

 
985

 UK real estate credit facility, due fiscal 2020
 
334

 
323

 
374

 European and Australian asset-based revolving credit facility, expires fiscal 2020
 
52

 

 
54

 Toys-Japan 1.85%-2.18% loans, due fiscals 2019-2021
 
40

 
44

 
52

 12.000% Taj senior secured notes, due fiscal 2021
 
578

 
577

 

 8.750% debentures, due fiscal 2021 (6)
 
22

 
22

 
22

 Finance obligations associated with capital projects
 
178

 
179

 
182

 Capital lease and other obligations
 
13

 
12

 
20


 
5,212

 
4,761

 
5,268

 Less: current portion
 
163

 
119

 
83

 Total Long-term debt (7)
 
$
5,049

 
$
4,642

 
$
5,185

(1)
Represents obligations of Toys “R” Us, Inc. (the “Parent Company”).
(2)
Represents obligations of Toys “R” Us Property Company II, LLC (“TRU Propco II”). TRU Propco II is a single-purpose entity and is a separate entity from the Company. The assets and credit of TRU Propco II and its direct parent Giraffe Junior Holdings, LLC (“Giraffe Junior”) are not available to satisfy the debts or other obligations of the Company or any affiliate.
(3)
Represents obligations of Toys “R” Us Delaware, Inc (“Toys-Delaware”).
(4)
Represents obligations of Toys “R” Us Property Company I, LLC and its subsidiaries (“TRU Propco I”).
(5)
Represents obligations of Giraffe Junior.
(6)
Represents obligations of the Parent Company and Toys-Delaware.
(7)
We may maintain derivative instruments on certain of our long-term debt. Refer to Note 3 entitled “Derivative instruments and hedging activities” for further details.
The Parent Company is a holding company and conducts its operations through its subsidiaries, certain of which have incurred their own indebtedness. Our credit facilities, loan agreements and indentures contain customary covenants that, among other things, restrict our ability to:
incur certain additional indebtedness;

7



transfer money between the Parent Company 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.
The amount of total net assets that were subject to such restrictions was $84 million as of April 29, 2017. 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 April 29, 2017, we have funds available to finance our operations under our $1.85 billion secured revolving credit facility (“ABL Facility”) through March 2019, subject to an earlier springing maturity, our two Toys-Japan unsecured credit lines through June 2017 and June 2018 and our European and Australian asset-based revolving credit facility (“European ABL Facility”) through December 2020. In addition, Asia JV and Toys-Japan have uncommitted lines of credit due on demand.
Asia JV uncommitted lines of credit, due on demand ($4 million at April 29, 2017)
Asia JV has several uncommitted unsecured lines of credit with various financial institutions with total availability of HK$282 million ($36 million at April 29, 2017). As of April 29, 2017, we had $4 million of borrowings, which has been included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet and $4 million of bank guarantees issued under these facilities. The remaining availability under these facilities was $28 million. The average interest rate on the drawn borrowings was 1.15% and 1.89% at April 29, 2017 and April 30, 2016, respectively.
Toys-Japan unsecured credit lines, expire fiscals 2017-2018 ($0 million at April 29, 2017)
Toys-Japan currently has an agreement with a syndicate of financial institutions, which includes two unsecured loan commitment lines of credit, “Tranche 1A” due fiscal 2017 and “Tranche 2” due fiscal 2018. Tranche 1A is available in amounts of up to ¥9.45 billion ($85 million at April 29, 2017) and expires on June 30, 2017. As of April 29, 2017 we had no outstanding borrowings under Tranche 1A, with $85 million of remaining availability. Tranche 2 is available in amounts of up to ¥9.45 billion ($85 million at April 29, 2017) and expires on June 29, 2018. As of April 29, 2017, we had no outstanding borrowings under Tranche 2, with $85 million of remaining availability.
Additionally, Toys-Japan has two uncommitted lines of credit with ¥1.0 billion and ¥0.5 billion of total availability, respectively. At April 29, 2017, we had no outstanding borrowings under these uncommitted lines of credit with a total of ¥1.5 billion ($13 million at April 29, 2017) of incremental availability.
$1.85 billion secured revolving credit facility, expires fiscal 2019 ($861 million at April 29, 2017)
Under our ABL Facility which expires on March 21, 2019 subject to an earlier springing maturity, we had outstanding borrowings of $861 million, a total of $93 million of outstanding letters of credit and excess availability of $301 million as of April 29, 2017. We are subject to a minimum excess availability covenant of $125 million, with remaining availability of $176 million in excess of the covenant at April 29, 2017. Availability is determined pursuant to a borrowing base, consisting of specified percentages of eligible inventory and credit card receivables and certain Canadian real estate less any applicable availability reserves, and generally peaks in the third quarter of our fiscal year.
European and Australian asset-based revolving credit facility, expires fiscal 2020 ($52 million at April 29, 2017)
The European ABL Facility, as amended, provides for a five-year £138 million ($179 million at April 29, 2017) asset-based senior secured revolving credit facility which expires on December 18, 2020. As of April 29, 2017, we had outstanding borrowings of $52 million, with $54 million of remaining availability under the European ABL Facility.

8



Giraffe Junior mezzanine loan, due fiscal 2019 ($73 million at April 29, 2017)
The Giraffe Junior mezzanine loan due fiscal 2019 requires TRU Propco II to make principal repayments of (i) available excess cash flow, (ii) escrow refunds and (iii) excess release proceeds, each as defined in the Giraffe Junior mezzanine loan agreement, following payment of monthly debt service and required reserves under the Propco II mortgage loan and Giraffe Junior mezzanine loan. During the thirteen weeks ended April 29, 2017, TRU Propco II made prepayments of $5 million related to available excess cash flow.
Subsequent Event
Senior unsecured term loan facility, due fiscal 2019 ($875 million at April 29, 2017)
The senior unsecured term loan facility due fiscal 2019 (the “Propco I Term Loan Facility”) requires TRU Propco I to prepay outstanding term loans with 25% of TRU Propco I’s annual excess cash flow (as defined in the Propco I Term Loan Facility), subject to the rights of the lenders to decline such prepayment. As a result, TRU Propco I made a prepayment of $29 million on May 9, 2017.

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
As of April 29, 2017 and January 28, 2017, we had two interest rate caps designated as cash flow hedges. As of April 30, 2016, we had one interest rate cap designated as a cash flow hedge. No material ineffectiveness was recorded for the thirteen weeks ended April 29, 2017 and April 30, 2016. We expect to reclassify a net loss of less than $1 million over the next 12 months to Interest expense from Accumulated other comprehensive loss.
Foreign Exchange Contracts
As of April 29, 2017, January 28, 2017 and April 30, 2016, we had foreign currency forward contracts to economically hedge the U.S. Dollar merchandise purchases of our foreign subsidiaries and our short-term, cross-currency intercompany loans with and between our foreign subsidiaries. These derivative contracts are not designated as hedges.
As of April 29, 2017, January 28, 2017 and April 30, 2016, derivative liabilities related to agreements that contain credit-risk related contingent features had fair values of $3 million, $1 million and $11 million, respectively.
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 Stockholders’ Deficit for the thirteen weeks ended April 29, 2017 and April 30, 2016:
 
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
Derivatives designated as cash flow hedges:
 
 
 
 
Beginning balance
 
$
2

 
$
1

Change in fair value recognized in Accumulated other comprehensive loss - Interest Rate Contracts
 
(1
)
 

Reclassifications from Accumulated other comprehensive loss - Interest Rate Contracts
 

 

Ending balance
 
$
1

 
$
1


9



The following table sets forth the impact of derivatives on Interest expense in our Condensed Consolidated Statements of Operations for the thirteen weeks ended April 29, 2017 and April 30, 2016:
 
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
Derivatives not designated for hedge accounting:
 
 
 
 
Loss on the change in fair value - Intercompany Loan Foreign Exchange Contracts (1)
 
$
(11
)
 
$
(2
)
Loss on the change in fair value - Merchandise Purchases Program Foreign Exchange Contracts
 

 
(15
)
Total Interest expense
 
$
(11
)
 
$
(17
)
(1)
(Losses) gains related to our short-term intercompany loan foreign exchange contracts are recorded in Interest expense, in addition to the corresponding foreign exchange gains and losses related to our short-term, cross-currency intercompany loans.
The following table contains the notional amounts and related fair values of our derivatives included within our Condensed Consolidated Balance Sheets as of April 29, 2017January 28, 2017 and April 30, 2016:
 
 
April 29,
2017
 
January 28,
2017
 
April 30,
2016
(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
 
$
50

 
$

 
$

 
$

 
$

 
$

Other assets
 
510

 
1

 
560

 
1

 
53

 

Foreign Currency Contracts not designated for hedge accounting:
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
190

 
6

 
229

 
7

 
80

 
1

Accrued expenses and other current liabilities
 
398

 
(7
)
 
226

 
(2
)
 
313

 
(15
)
Total derivative contracts outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
240

 
6

 
229

 
7

 
80

 
1

Other assets
 
510

 
1

 
560

 
1

 
53

 

Total derivative assets (1)
 
$
750

 
$
7

 
$
789

 
$
8

 
$
133

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued expenses and other current liabilities
 
398

 
(7
)
 
226

 
(2
)
 
313

 
(15
)
Total derivative liabilities (1)
 
$
398

 
$
(7
)
 
$
226

 
$
(2
)
 
$
313

 
$
(15
)
(1)
Refer to Note 4 entitled “Fair value measurements” for the classification of our derivative instruments within the fair value hierarchy.

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.

10



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. At the end of each period, we evaluate the inputs used to value our derivatives, which are primarily classified as Level 2.
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 tables below present our assets and liabilities measured at fair value on a recurring basis as of April 29, 2017, January 28, 2017 and April 30, 2016, aggregated by level in the fair value hierarchy within which those measurements fall.
(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
April 29, 2017
Assets
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$
1

 
$

 
$
1

Foreign exchange contracts
 

 
6

 

 
6

Total assets
 
$

 
$
7

 
$

 
$
7

Liabilities
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
$
7

 
$

 
$
7

Total liabilities
 
$

 
$
7

 
$

 
$
7

(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
January 28, 2017
Assets
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$
1

 
$

 
$
1

Foreign exchange contracts
 

 
7

 

 
7

Total assets
 
$

 
$
8

 
$

 
$
8

Liabilities
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
$
2

 
$

 
$
2

Total liabilities
 
$

 
$
2

 
$

 
$
2

(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
April 30, 2016
Assets
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$

 
$

 
$

Foreign exchange contracts
 

 
1

 

 
1

Total assets
 
$

 
$
1

 
$

 
$
1

Liabilities
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$

 
$

 
$

Foreign exchange contracts
 

 
15

 

 
15

Total liabilities
 
$

 
$
15

 
$

 
$
15


11



For the periods ended April 29, 2017, January 28, 2017 and April 30, 2016, 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. For the thirteen weeks ended April 29, 2017 and April 30, 2016, we did not have any long-lived asset impairments.
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 thirteen weeks ended April 29, 2017 and April 30, 2016. The table below presents the carrying values and fair values of our Long-term debt including current portion as of April 29, 2017January 28, 2017 and April 30, 2016, 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)
April 29, 2017
 
$
5,212

 
$
5,022

 
$
197

 
$
2,696

 
$
2,129

January 28, 2017
 
4,761

 
4,560

 
204

 
2,679

 
1,677

April 30, 2016
 
5,268

 
4,935

 
1,435

 
2,152

 
1,348

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, accrued expenses and short-term borrowings. 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 (benefit) and effective tax rates for the thirteen weeks ended April 29, 2017 and April 30, 2016:
 
 
13 Weeks Ended
($ In millions)
 
April 29,
2017
 
April 30,
2016
Loss before income taxes
 
$
(160
)
 
$
(129
)
Income tax expense (benefit)
 
3

 
(4
)
Effective tax rate
 
(1.9
)%
 
3.1
%
The effective tax rates for the thirteen weeks ended April 29, 2017 and April 30, 2016 were based on our forecasted effective tax rates, adjusted for discrete items that occurred within the periods presented. Our forecasted effective tax rate was (1.5)% for the thirteen weeks ended April 29, 2017 compared to 4.1% for the same period last year. The difference between our forecasted effective tax rates was primarily due to a change in the mix and level of earnings between jurisdictions.

There were no significant discrete items that impacted our effective tax rate for the thirteen weeks ended April 29, 2017. For the thirteen weeks ended April 30, 2016, our effective tax rate was impacted by a tax expense of $1 million related to adjustments to deferred taxes resulting from a change in statutory tax rate.

6. Segments
Our reportable segments are Toys “R” Us – Domestic (“Domestic”), which provides toy and baby product offerings in 49 states in the United States, Puerto Rico and Guam, and Toys “R” Us – International (“International”), which operates or licenses “R” Us branded retail stores in 37 foreign countries and jurisdictions with operated stores in Australia, Austria, Brunei, Canada,

12



China, France, Germany, Hong Kong, Japan, Malaysia, Poland, Portugal, Singapore, Spain, Switzerland, Taiwan, Thailand and the United Kingdom. Our Domestic and International segments also include their respective e-commerce operations. Segment Operating earnings (loss) excludes corporate related charges and income. All intercompany transactions between the segments have been eliminated. Revenues from external customers are derived primarily from merchandise sales and we do not generate material sales from any single customer.
The following tables show our percentage of Net sales by product category:
 
 
13 Weeks Ended
Domestic:
 
April 29,
2017
 
April 30,
2016
Baby
 
46.7
%
 
48.8
%
Core Toy
 
15.1
%
 
13.7
%
Entertainment
 
6.0
%
 
5.6
%
Learning
 
18.2
%
 
17.9
%
Seasonal
 
13.4
%
 
13.7
%
Other (1)
 
0.6
%
 
0.3
%
Total
 
100
%
 
100
%
(1)
Consists primarily of non-product related revenues.
 
 
13 Weeks Ended
International:
 
April 29,
2017
 
April 30,
2016
Baby
 
26.1
%
 
26.9
%
Core Toy
 
20.8
%
 
20.6
%
Entertainment
 
6.7
%
 
5.3
%
Learning
 
28.4
%
 
29.0
%
Seasonal
 
17.1
%
 
17.3
%
Other (1)
 
0.9
%
 
0.9
%
Total
 
100
%
 
100
%
(1)
Consists primarily of non-product related revenues, including licensing revenue from unaffiliated third parties.
From time to time, we may make revisions to our prior period Net sales by product category to conform to the current period allocation. These revisions did not have a significant impact to our prior year disclosure.

13



A summary of financial information by reportable segment is as follows:
 
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
Net sales
 
 
 
 
Domestic
 
$
1,366

 
$
1,458

International
 
840

 
861

Net sales
 
$
2,206

 
$
2,319

Gross margin
 
 
 
 
Domestic
 
$
459

 
$
515

International
 
324

 
331

Gross margin
 
$
783

 
$
846

Operating earnings (loss)
 
 
 
 
Domestic
 
$
29

 
$
67

International
 

 
10

Corporate and other
 
(83
)
 
(84
)
Operating loss
 
(54
)
 
(7
)
Interest expense
 
(107
)
 
(123
)
Interest income
 
1

 
1

Loss before income taxes
 
$
(160
)
 
$
(129
)
(In millions)
 
April 29,
2017
 
January 28,
2017
 
April 30,
2016
Merchandise inventories
 
 
 
 
 
 
Domestic
 
$
1,552

 
$
1,708

 
$
1,509

International
 
877

 
768

 
924

Merchandise inventories
 
$
2,429

 
$
2,476

 
$
2,433


7. Litigation and legal proceedings
We 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, 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 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 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
Sponsor Advisory Agreement
We are owned by an investment group led by entities advised by or affiliated with Bain Capital Private Equity, L.P., 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 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, June 1, 2015 and December 1, 2015 (“Advisory Agreement”). The term of the Advisory Agreement is currently a one-year renewable term unless we or the Sponsors provide notice of termination to the other. Management and advisory fees (the “Advisory Fees”) of $6 million per annum are payable on a quarterly basis. We recorded Advisory Fees of $2 million for each of the thirteen weeks ended April 29, 2017 and April 30, 2016. During each of the thirteen weeks ended April 29, 2017 and April 30, 2016, we also paid the Sponsors for nominal out-of-pocket expenses.

14



Other Relationships and Transactions with our Sponsors
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. The Sponsors did not own any of our debt during the thirteen weeks ended April 29, 2017. During the thirteen weeks ended April 30, 2016, affiliates of KKR held debt and debt securities issued by the Company and its subsidiaries.  The interest amounts on such debt and debt securities held by related parties were $1 million during the thirteen weeks ended April 30, 2016.
Additionally, under lease agreements with affiliates of Vornado, we paid an aggregate amount of $3 million and $2 million for the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively, with respect to less than 1% of our operated stores, which include Toys “R” Us Express stores. Of the aggregate amount paid, $1 million and less than $1 million for the thirteen weeks ended April 29, 2017 and April 30, 2016, 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 we 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.

9. Dispositions
During the thirteen weeks ended April 29, 2017, we sold certain assets for nominal proceeds, resulting in nominal net gains. Net gains on sales are included in Other income, net on our Condensed Consolidated Statements of Operations.

10. Accumulated other comprehensive loss
Total other comprehensive income, net of tax is included in the Condensed Consolidated Statements of Comprehensive Loss and Condensed Consolidated Statements of Stockholders’ Deficit. Accumulated other comprehensive loss is reflected in Total stockholders’ deficit on the Condensed Consolidated Balance Sheets, as follows:
(In millions)
 
Foreign currency
translation
adjustments,
net of tax
 
Unrealized gain
on hedged
transactions,
net of tax
 
Unrecognized
actuarial losses,
net of tax
 
Accumulated
other
comprehensive
loss
Balance, January 30, 2016
 
$
(249
)
 
$
1

 
$
(22
)
 
$
(270
)
Change
 
68

 

 

 
68

Balance, April 30, 2016
 
$
(181
)
 
$
1

 
$
(22
)
 
$
(202
)
 
 
 
 
 
 
 
 
 
(In millions)
 
Foreign currency
translation
adjustments,
net of tax
 
Unrealized gain
on hedged
transactions,
net of tax
 
Unrecognized
actuarial losses,
net of tax
 
Accumulated
other
comprehensive
loss
Balance, January 28, 2017
 
$
(210
)
 
$
2

 
$
(32
)
 
$
(240
)
Change
 
4

 
(1
)
 
(1
)
 
2

Balance, April 29, 2017
 
$
(206
)
 
$
1

 
$
(33
)
 
$
(238
)

11. Recent accounting pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09 “Compensation-Stock Compensation (Topic 718)” (“ASU 2017-09”). ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have an impact on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its

15



right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. The accounting applied by the lessor is largely unchanged from that applied under current GAAP. The amendments of this ASU are effective for reporting periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Management is currently assessing the impact the adoption of ASU 2016-02 will have 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. The amendments of ASU 2014-09 were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Subsequent to issuing ASU 2014-09, the FASB issued the following amendments concerning the adoption and clarification of ASU 2014-09. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date,” which deferred the effective date one year. As a result, the amendments of ASU 2014-09 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. In April 2016, the FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing,” which reduces the complexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. In December, FASB issued ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”). ASU 2016-20 provides update to Accounting Standards Codification 606, “Revenue from Contracts with Customers,” which will allow entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. It also makes 12 additional technical corrections and improvements to the new revenue standard. While the Company is continuing to assess all of the potential impacts of the new standard, we generally anticipate having substantially similar performance obligations under the amended guidance. The Company does not expect the implementation of the standard will have a material effect on the Company's consolidated results of operations, cash flows or financial position. The Company currently anticipates utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented, and plans to adopt the standard as of the first day of fiscal 2018 (February 4, 2018).

16



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, Inc. and its consolidated subsidiaries, except as expressly indicated or unless the context otherwise requires. 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 historical results of operations during the periods presented and our financial condition. Throughout this MD&A when discussing our results of operations, we refer to the impact of foreign currency translation on our International results.  Transactions in our International segment are recorded in each market’s functional currency, then converted to U.S. Dollar for financial reporting.  We calculate the effect of changes in foreign currency exchange rates by measuring the difference between current period activity translated at the current period’s foreign exchange rates and current period activity translated at last period’s rates. This MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 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 a variety of toy and baby products worldwide through our omnichannel offerings that leverage the synergies between our brick-and-mortar stores and e-commerce. Our reportable segments are Toys “R” Us – Domestic (“Domestic”), which operates in 49 states, Puerto Rico and Guam, and Toys “R” Us – International (“International”), which operates or licenses stores in 37 foreign countries and jurisdictions. As of April 29, 2017, there were 1,694 operated and 259 licensed “R” Us branded retail stores worldwide. Our Domestic and International segments also include their respective e-commerce operations.

Financial Performance
As discussed in more detail in this MD&A, the following financial data represents an overview of our financial performance for the thirteen weeks ended April 29, 2017 compared to the thirteen weeks ended April 30, 2016:
 
 
13 Weeks Ended
($ In millions)
 
April 29,
2017
 
April 30,
2016
Net sales
 
$
2,206

 
$
2,319

Same store sales
 
(4.1
)%
 
0.9
%
Gross margin
 
$
783

 
$
846

Gross margin as a percentage of Net sales
 
35.5
 %
 
36.5
%
Selling, general and administrative expenses (“SG&A”)
 
$
779

 
$
805

SG&A as a percentage of Net sales
 
35.3
 %
 
34.7
%
Net loss attributable to Toys “R” Us, Inc.
 
$
(164
)
 
$
(126
)
Non-GAAP Financial Measure:
 
 
 
 
Adjusted EBITDA (1)
 
$
44

 
$
79

(1)
For an explanation of Adjusted EBITDA as a measure of the Company’s operating performance and a reconciliation to Net loss attributable to Toys “R” Us, Inc., see “Non-GAAP Financial Measure - Adjusted EBITDA”.
First quarter 2017 financial highlights:
Net sales decreased by $113 million compared to the prior year period, due to a decline in same store sales.
Consolidated same store sales decreased by 4.1 percentage points as a result of declines in both our Domestic and International segments.
Gross margin, as a percentage of Net sales, (“Gross margin rate”) declined in our Domestic segment, while International remained relatively consistent with the prior year period.
SG&A decreased by $26 million primarily due to reductions in professional fees.
Net loss attributable to Toys “R” Us, Inc. increased by $38 million.

Same Store Sales
In computing same store sales, we include stores that have been open for at least 56 weeks from their “soft” opening date. A soft opening is typically two weeks prior to the grand opening. Express stores that have a cumulative lease term of at least two years (“Long-Term Express”) and have been open for at least 56 weeks from their soft opening date are also included in the computation of same store sales.

17



Our same store sales computation includes the following:
stores that have been remodeled 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 or contracted within their current locations; and
sales from our e-commerce businesses.
By measuring the year-over-year sales of merchandise in the stores that have been open for 56 weeks or more and online, we can better gauge how the core store base and e-commerce business is performing since same store sales excludes the impact of store openings and closings. We calculate International same store sales by applying prior year foreign exchange rates to both current year and prior year sales to provide a consistent basis for comparison.
Various factors affect same store sales, including the number of and timing of stores we open, close, convert, relocate, expand or contract, 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, terrorism and catastrophic events can affect same store sales because they may discourage travel or require temporary store closures, thereby reducing customer traffic. These factors have caused our same store sales to fluctuate significantly in the past on a monthly, quarterly and annual basis and, as a result, we expect that same store sales will continue to fluctuate in the future.
The changes in our same store sales for the thirteen weeks ended April 29, 2017 and April 30, 2016 are as follows:
 
 
13 Weeks Ended
 
 
April 29, 2017
vs. 2016
 
April 30, 2016
vs. 2015
Domestic
 
(6.2
)%
 
0.1
%
International
 
(0.6
)%
 
2.5
%
Toys “R” Us - Consolidated
 
(4.1
)%
 
0.9
%

Percentage of Net Sales by Product Category
 
 
13 Weeks Ended
Domestic:
 
April 29,
2017
 
April 30,
2016
Baby
 
46.7
%
 
48.8
%
Core Toy
 
15.1
%
 
13.7
%
Entertainment
 
6.0
%
 
5.6
%
Learning
 
18.2
%
 
17.9
%
Seasonal
 
13.4
%
 
13.7
%
Other (1)
 
0.6
%
 
0.3
%
Total
 
100
%
 
100
%
(1)
Consists primarily of non-product related revenues.

18



 
 
13 Weeks Ended
International:
 
April 29,
2017
 
April 30,
2016
Baby
 
26.1
%
 
26.9
%
Core Toy
 
20.8
%
 
20.6
%
Entertainment
 
6.7
%
 
5.3
%
Learning
 
28.4
%
 
29.0
%
Seasonal
 
17.1
%
 
17.3
%
Other (1)
 
0.9
%
 
0.9
%
Total
 
100
%
 
100
%
(1)
Consists primarily of non-product related revenues, including licensing revenue from unaffiliated third parties.
From time to time, we may make revisions to our prior period Net sales by product category to conform to the current period allocation. These revisions did not have a significant impact to our prior year disclosure.

Store Count by Segment
Store Type
 
Domestic
 
International
 
Toys “R” Us - Consolidated
 
April 29,
2017
 
April 30,
2016
 
April 29,
2017 (1)
 
April 30,
2016
 
April 29,
2017
 
April 30,
2016
Traditional Toy
 
358

 
361

 
578

 
533

 
936

 
894

Side by Side
 
212

 
213

 
207

 
203

 
419

 
416

Baby
 
223

 
222

 
12

 
13

 
235

 
235

Long-Term Express
 
42

 
45

 
18

 
7

 
60

 
52

Outlet
 
44

 
30

 

 

 
44

 
30

Total Operated
 
879

 
871

 
815

 
756

 
1,694

 
1,627

 
 
 
 
 
 
 
 
 
 
 
 
 
Excluded from store count:
 
 
 
 
 
 
 
 
 
 
 
 
Licensed
 

 

 
259

 
250

 
259

 
250

Temporary Express
 
10

 
19

 
23

 
24

 
33

 
43

(1)
The net increase in International stores compared to the prior year is primarily due to 35 stores in China and Southeast Asia.

Net Loss Attributable to Toys “R” Us, Inc.
 
 
13 Weeks Ended
(In millions)
 
April 29,
2017
 
April 30,
2016
 
Change
Toys “R” Us - Consolidated
 
$
(164
)
 
$
(126
)
 
$
(38
)
Net loss attributable to Toys “R” Us, Inc. increased by $38 million to $164 million for the thirteen weeks ended April 29, 2017, compared to $126 million for the same period last year. The increase was primarily due to a $63 million decline in Gross margin, partially offset by a reduction in SG&A of $26 million.

Net Sales
 
 
13 Weeks Ended
 
 
 
 
 
 
 
 
 
 
Percentage of Net Sales
($ In millions)
 
April 29,
2017
 
April 30,
2016
 
$ Change
 
% Change
 
April 29,
2017
 
April 30,
2016
Domestic
 
$
1,366

 
$
1,458

 
$
(92
)
 
(6.3
)%
 
61.9
%
 
62.9
%
International
 
840

 
861

 
(21
)
 
(2.4
)%
 
38.1
%
 
37.1
%
Toys “R” Us - Consolidated
 
$
2,206

 
$
2,319

 
$
(113
)
 
(4.9
)%
 
100.0
%
 
100.0
%
Net sales decreased by $113 million or 4.9%, to $2,206 million for the thirteen weeks ended April 29, 2017, compared to $2,319 million for the same period last year. Foreign currency translation decreased Net sales by $24 million for the thirteen weeks ended April 29, 2017.

19



Excluding the impact of foreign currency translation, the decrease in Net sales was primarily due to a decline in same store sales driven by a decrease in the number of transactions. Consolidated e-commerce sales increased 3% for the thirteen weeks ended April 29, 2017, compared to the same period last year.
Domestic
Net sales for our Domestic segment decreased by $92 million or 6.3%, to $1,366 million for the thirteen weeks ended April 29, 2017, primarily due to a decline in same store sales of 6.2%.
The decrease in same store sales resulted primarily from decreases in our baby and seasonal categories. The decline in our baby category was mainly due to baby gear and infant care products. The decline in our seasonal category was predominantly due to outdoor products.
International
Net sales for our International segment decreased by $21 million or 2.4%, to $840 million for the thirteen weeks ended April 29, 2017. Excluding a $24 million decrease from foreign currency translation, International Net sales improved by $3 million, primarily as a result of an increase in net sales from new locations, partially offset by a 0.6% decrease in same store sales driven by our Europe market.
The decrease in same store sales resulted primarily from decreases in our baby and learning categories. The decrease in our baby category was mainly due to consumables and infant care products. The decrease in our learning category was predominantly due to construction toys. Partially offsetting these decreases was an increase in our entertainment category, primarily due to video game systems.

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 Net Sales
($ In millions)
 
April 29,
2017
 
April 30,
2016
 
$ Change
 
April 29,
2017
 
April 30,
2016
 
Change
Domestic
 
$
459

 
$
515

 
$
(56
)
 
33.6
%
 
35.3
%
 
(1.7
)%
International
 
324

 
331

 
(7
)
 
38.6
%
 
38.4
%
 
0.2
 %
Toys “R” Us - Consolidated
 
$
783

 
$
846

 
$
(63
)
 
35.5
%
 
36.5
%
 
(1.0
)%
Gross margin decreased by $63 million to $783 million for the thirteen weeks ended April 29, 2017, compared to $846 million for the same period last year. Foreign currency translation decreased Gross margin by $10 million.
Gross margin rate decreased by 100 basis points for the thirteen weeks ended April 29, 2017, compared to the same period last year. The decrease in Gross margin rate was due to margin rate declines in our Domestic segment.
Domestic
Gross margin decreased by $56 million to $459 million for the thirteen weeks ended April 29, 2017. Gross margin rate decreased by 170 basis points for the thirteen weeks ended April 29, 2017, compared to the same period last year.
The decrease in Gross margin rate for the thirteen weeks ended April 29, 2017 resulted primarily from an increase in sales of products on promotion and an increase in recorded inventory reserves.

20



International
Gross margin decreased by $7 million to $324 million for the thirteen weeks ended April 29, 2017. Foreign currency translation decreased Gross margin by $10 million. Gross margin rate remained relatively consistent for the thirteen weeks ended April 29, 2017, compared to the same period last year.

Selling, General and Administrative Expenses
The following table presents expenses as a percentage of consolidated SG&A:
 
 
13 Weeks Ended
 
 
April 29,
2017
 
April 30,
2016
Payroll and related benefits
 
46.1
%
 
45.4
%
Occupancy costs
 
31.8
%
 
31.7
%
Advertising and promotional expenses
 
7.1
%
 
7.0
%
Transaction fees (1)
 
3.2
%
 
3.6
%
Professional fees
 
2.4
%
 
3.3
%
Other (2)
 
9.4
%
 
9.0
%
Total
 
100.0
%
 
100.0
%
(1)
Primarily consists of credit card fees.
(2)
Includes costs related to website hosting, transporting merchandise from distribution centers to stores, store related supplies and signage and other corporate-related expenses.
 
 
13 Weeks Ended
 
 
 
 
 
 
 
 
Percentage of Ne