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Toys 'R' Us plans unit IPO
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March 20, 2000: 2:05 p.m. ET
Retailer plans an IPO of Japan unit and a $1 billion buyback program
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NEW YORK (CNNfn) - Toys "R" Us Inc. announced Monday that it planned to take its Japanese unit public and expand its stock-repurchasing program to $1 billion, a move aimed at boosting the company's sagging stock.
The world's largest specialty toy retailer, which has seen its stock trading near 10-year lows, said it plans an initial public offering of Toys "R" Us - Japan Ltd., subject to Japanese government approval. Toys "R" Us said it will retain a "significant" ownership stake in the unit, but that it would be less than 50 percent. Toys "R" Us also said it will no longer include the Japanese unit in its consolidated financial statements.
The news prompted Standard & Poor's to lower its long-term corporate credit rating of the company to triple 'B'-plus from single 'A'-minus. That means the company remains investment grade, but is one step away from speculative.
"Standard & Poor's believes that management, under the leadership of its new chief executive officer, John Eyler, has identified key areas for improvement in the company's faltering toy superstores," the S & P research note said. "However, this is not a quick-fix solution, and the time frame for turning the business around, and for at least slowing the loss in market share to discounters and specialty stores, is likely to take a couple of years in Standard & Poor's opinion."
The Paramus, N.J.-based company also said the new $1 billion stock buyback was in addition to the $1 billion repurchase program announced in 1998. Only $6 million remains under the 1998 program.
"This new $1 billion share repurchase program reflects the board's belief that Toys "R" Us stock is undervalued, given the strength of our global, highly recognizable brand name, and the additional value we are creating through our operating strategies," said John Eyler, the company's president and chief executive.
Bob Schweich, a retail analyst with Schroder and Co., applauded both moves, saying that it would likely help the company reduce some of its nearly $200 million in long-term debt in Japanese yen loans.
"This is not a quick-fix solution," Schweich said. "They have a new management team there that's spelled out a lot of programs. They're going about doing that in the United States ... The move in Japan is a structural one where they can presumably sell part of their interest in the Japanese operations at a far higher valuation, so it's a financial move that, in my judgment, makes a lot of sense."
The move comes three months after Toys "R" Us posted a drop in profit during a disappointing holiday season, marred by fewer sales and inventory troubles.
The company also suffered highly publicized difficulties with fulfilling orders on its Web site, Toysrus.com, during the holidays.
Following the announcement, Toys "R" Us (TOY: Research, Estimates) shares edged up 7/8 to 13-5/16 in early afternoon trading.
Toys "R" Us operates 1,552 stores worldwide, with 710 toy stores in the Unites States and 465 overseas toy stores. These include its franchise stores: Kids "R" Us; Babies "R" Us; and Imaginarium stores. The company also operates Web sites and a mail-order catalog business. 
--from staff and wire reports
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