The Toys R Us LBO Harvard Case Solution & Analysis


Toys ‘R’ US is one of the world’s biggest juvenile products retailer and a leading dedicated toy retailer. The company has almost 1499 retail stores overall the world. The company has generated around 11.1 billion in revenues till 29th January, 2005. The increase in the sales constitute around 1.9 percent per year. The main strong competitors of this company are Target and Wal-Mart. The company has suffered a lot due to these two competitors because of their increased competition from the channel discounts and the downstream demand also. Now the situation is that a group of private equity investors are looking for a Leverage buyout of the company. However, they are not sure about the risk involved in this investment and want to know the risks and merits of this investment. They want to evaluate the multiple operating model scenarios based on certain assumptions and strategic actions to identify the risk and return profile of this investment.

toys r us lbo case solution

toys r us lbo case solution


The transaction proposed has both the risks and merits along with it. The industry, in which Toy R US currently is in, a state of decline. Therefore, Vornado Realty Trust, Bain and KKR will have to face the risk in this industry. The projections regarding the future sales are also not positive. The threat emerging due to the competitors such as Target and Wal-Mart is also very strong and this would erode the position of Toy R US Company. Apart from this, the LBO transaction is a club deal which means that more than one private equity firms will have controls over it. Therefore, all the investors will have limited control.

If we talk about the merits of this transaction then there are many. First of all the company has a lot of cash flow. This is an ideal condition for an LBO because the company will not face any issues in the future to pay off its debts when they fall due. Also there seems to be new growth for the retail toy industry in Europe. This is a positive point and this offers a room for exit strategy to the LBO for moving into the European markets.


The US toy industry was on the fall in 2002. Sales had fallen by 4% between 2004 and 2005. One of the main reasons for these threats was that the preferences of the younger children were changing and these children now preferring electronics and video games over the traditional toys. However, still the analysts had projected that the sales would grow by 0 to 2% over the next three to five years. But the small incumbent companies were being threatened by intense competition from Target and Wal-Mart companies. The pressure was high due to high discounts being offered by the stores. Apart from this the success of a traditional toy manufacturer depended upon following the demand and product trends. For instance, if a retailer underestimated or overestimated the demand for the toys, it would affect significantly on the company’s profits. The consumer spending was another reason for these changes in demands. The whole industry was on the declining path, however, only one segment was still growing and this was the toddler, infant and the pre-school market. Also the retail toy industry in the Europe was doing fine. In 2005 the toy sales growth rate increased by 3 percent and the analysts estimated that this rate would outperform the sales growth rate in US.


Some of the few due diligence questions that Toys R US should be asked are listed below:

  • What are the sustainable competitive advantages of the company?
  • What does the growth strategy of the company focus upon?
  • Where does Toys R US fit in the industry value chain?
  • What is the historical growth trend of this market?
  • What are the key macroeconomic drivers of the business?
  • How many customers and suppliers do you have?
  • How much is the business capital intensive?
  • What are the Key Performance Indicators which the management uses to keep track of the performances?
  • Who are your main competitors?

These are some of the most important questions which should be asked from the management of Toys R US.........................

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