Toys R Us' Execs Seek Hefty Bonuses, Piss People Off
Happy holidays, ya'll. You're fired. In what should be a surprise to no one, Toys R Us isn't immune to store closures. In the first instance, it plans to close 25 UK-based locations. If you think the US won't see closures and/or consolidation of Toys/Babies shops, you're smoking some serious crack (as we've said before). Indeed, the company recently filed a motion establishing procedures to extend the time to deal with its non-residential real property leases. Buckle your seat belts, landlords.
Speaking of smoking crack, the U.S. Trustee for the Department of Justice (UST) apparently thinks the company and its advisors have been at it with the good stuff; it went full-on Demi Moore with its vigorous objection to the company's mid-November motion to pay executives up to $32mm in bonuses if "Stretch" EBITDA targets are met (and slightly less upon achievement of a "Target" EBITDA level). These numbers - on the heels of millions of dollars of pre-bankruptcy bonuses paid to the very same executives - made their way through the mainstream (and not so mainstream) media and garnered some well-deserved outrage. PETITION NOTE: All of the sudden everyone is an executive compensation expert, it seems. To be fair, it is awfully counter-intuitive that the very same professionals at the helm when the ship hit Iceberg #1 need incentives to avoid Iceberg #2. Like, "eff you, guys, good luck getting a job elsewhere after this dumpster fire of a hot mess" seems to be the general public sentiment. But therein lies the push-pull bankruptcy dynamic. Switch out management now - while credit terms are non-existent, vendor/supplier relationships are strained, customers are nonplussed, competitors are champing at the bit, etc. - and its possible that, with the absence of institutional knowledge, the company could end up in even WORSE shape and stumble towards liquidation. And so this is where the Kirkland & Ellis LLP attorneys - all SEVEN of the partners listed on their filed papers - really earn their billing rate (a point we're guessing they hammer home whilst pitching management teams); they need to convince the Judge, the UST and, here, the public, that the lofty amounts they seek approval for derive value in return. And "value," here, is unequivocally a "going concern" business that can continue to employ people and contribute to the tax base.
But, first, the company (and Kirkland) had to deal with the Official Committee of Unsecured Creditors (UCC), a fiduciary body that represents all similarly-situated unsecured creditors in the bankruptcy process (read: most vendors, suppliers, customers, employees). Late Friday night the UCC filed its "Statement" in response to the company's motion. The statement expresses support for the company's proposed plan but ONLY after the UCC negotiated various changes to the extent and timing of the compensation sought. The UCC states, "[t]he Committee recognizes the importance of maintaining strong employee morale and ensuring that management and employees are collectively working towards the common goal of a successful holiday season and a strong and viable reorganized company." So, now, per the UCC's agreement with the company (and subject, still, to the UST and the Court), ONLY $16mm and $21mm will be payable to executives if "Target EBITDA" and "Stretch EBITDA" goals, respectively, are met. And the timing of payment has been altered as well, deferring and pinning greater amounts to the consummation of a reorganization. The UCC continues, "This feature...is particularly important to the Committee in the absence of a plan support agreement or defined business plan for the case, and in the face of the distinct business pressures imposed on retail companies in chapter 11." In other words, the UCC is worried about enriching execs only to see the company liquidate. And, given the state of retail today, they damn well should be - particularly since, we assume, the UCC has insight into how the business fared on Black Friday and Cyber Monday. Marinate on that.
Lastly, permit us to issue you your weekly reminder that DIP Lenders justify the $3+b loan to Toys R Us on, what we now dub, a "there must be one" basis. In other words, "there must be one" bigbox toy retailer. Just like there is, you know, for sports (Dick's Sporting Goods ($DKS)) and books (Barnes & Noble ($BKS)). So, how IS the "one" doing in books? Well, BKS reported earnings this past week and it wasn't pretty. Sales were down 7.9%, comps were down 6.3% and earnings per share continued to trend deeper into the negative. But have no fear: the company has a creative and revolutionary go-forward strategy: "place a greater emphasis on books." Yup, you read that right.