Toys "R" Us Ratings Remain on S&PWatch, Negative
NY -- Standard & Poor's CreditWire 2/14/96 -- Standard & Poor's double-`A' senior debt of Toys "R" Us and `A-1'-plus commercial paper ratings of Toys "R" Us and TRU of Puerto Rico Inc. remain on CreditWatch with negative implications, where they were placed Nov. 20, 1995. About $400 million of rated debt is outstanding. The CreditWatch placement continues to reflect Standard & Poor's concern that Toys "R" Us may be unable to maintain the earnings levels expected for the current rating. Given the company's announcement that operating profit for the year should decline to $740 million from $912 million in 1994, return on permanent capital likely will fall below levels of recent years. Although returns had declined from the 20%-25% range in the late 1980s, this ratio consistently measured 17%-18% over the past four years. The outlook for restoring returns to levels more indicative of the current rating is uncertain, given an increasingly competitive retail environment and the company's near-term investment strategy to enhance market share and longer- term profitability. To improve its competitive position, the company is restructuring its operations and testing several new store formats, including a new prototype toy store, Babies "R" Us stores, and megastores incorporating all the "R" Us concepts under one roof. The restructuring, which will result in a $270 million after-tax charge in 1995, is designed to reduce costs by streamlining the inventory assortment and consolidating distribution and administrative facilities. Standard & Poor's will meet with management to discuss the new strategies and the potential for improving long-term profitability. -- CreditWire
Credit Analyst: | Mary Lou Burde, CFA (1) 212-208-1959 |
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