TOYS R US INC - FORM 10-Q

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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - TOYS R US INC	tru4292017-ex322.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - TOYS R US INC	tru4292017-ex321.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) - TOYS R US INC	tru4292017-ex312.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) - TOYS R US INC	tru4292017-ex311.htm

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

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 (Unaudited)
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Statements of Comprehensive Loss	3
Condensed Consolidated Statements of Cash Flows	4
Condensed Consolidated Statements of Stockholders’ Deficit	5
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	30
Item 4. Mine Safety Disclosures	30
Item 5. Other Information	30
Item 6. Exhibits	30
SIGNATURE	31
INDEX TO EXHIBITS	32

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.

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.

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.

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.

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		Additional Paid-in Capital		Total Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Deficit			Noncontrolling Interest			Total Deficit
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.

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.

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, 2017, January 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;


•	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.

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

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, 2017, January 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.

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

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, 2017, January 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,

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.

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.

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

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).


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.

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.



	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.

Store Count by Segment



Store Type	Domestic		International		Toys “R” Us - Consolidated
Store Type	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.

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.

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 Net Sales
($ In millions)	April 29, 2017		April 30, 2016		$ Change			April 29, 2017		April 30, 2016		Change
Toys “R” Us - Consolidated	$	779	$	805	$	(26	)	35.3	%	34.7	%	0.6	%

SG&A decreased by $26 million to $779 million for the thirteen weeks ended April 29, 2017, compared to $805 million for the same period last year. Foreign currency translation decreased SG&A by $9 million. As a percentage of Net sales, SG&A increased by 60 basis points.

Excluding the impact of foreign currency translation, SG&A decreased by $17 million primarily due to an $8 million decline in professional fees, which included $4 million of litigation expenses in the prior year.

Depreciation and Amortization



	13 Weeks Ended
(In millions)	April 29, 2017		April 30, 2016		Change
Toys “R” Us - Consolidated	$	75	$	80	$	(5	)

Depreciation and amortization decreased by $5 million for the thirteen weeks ended April 29, 2017, compared to the same period last year. The decrease was primarily due to fully depreciated assets.

Other Income, Net

Other income, net includes the following:


•	credit card program income;


•	gift card breakage income;


•	foreign exchange gains and losses;


•	net gains on sales;


•	impairment of long-lived assets; and


•	other operating income and expenses.



	13 Weeks Ended
(In millions)	April 29, 2017		April 30, 2016		Change
Toys “R” Us - Consolidated	$	17	$	32	$	(15	)

Other income, net decreased by $15 million to $17 million for the thirteen weeks ended April 29, 2017. The decrease was primarily due to an $18 million increase in unrealized loss on foreign exchange related to the re-measurement of the Tranche A-1 loan facility attributed to Toys-Canada Ltd. Toys “R” Us (Canada) Ltee (“Toys-Canada”).

Interest Expense



	13 Weeks Ended
(In millions)	April 29, 2017		April 30, 2016		Change
Toys “R” Us - Consolidated	$	107	$	123	$	(16	)

Interest expense decreased by $16 million for the thirteen weeks ended April 29, 2017, compared to the same period last year. The decrease was primarily due to the change in fair value of derivative contracts.

Interest Income



	13 Weeks Ended
(In millions)	April 29, 2017		April 30, 2016		Change
Toys “R” Us - Consolidated	$	1	$	1	$	—

Interest income remained consistent for the thirteen weeks ended April 29, 2017, compared to the same period last year.

Income Tax Expense (Benefit)

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		%

Non-GAAP Financial Measure - Adjusted EBITDA

We believe Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Investors in the Company regularly request Adjusted EBITDA as a supplemental analytical measure to, and in conjunction with, the Company’s financial data prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We understand that investors use Adjusted EBITDA, among other things, to assess our period-to-period operating performance and to gain insight into the manner in which management analyzes operating performance.

In addition, we believe that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA and Adjusted EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which items may vary for different companies for reasons unrelated to overall operating performance. We use the non-GAAP financial measures for planning and

forecasting and measuring results against the forecast and in certain cases we use similar measures for bonus targets for certain of our employees. Using several measures to evaluate the business allows us and investors to assess our relative performance against our competitors.

Although we believe that Adjusted EBITDA can make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies, even in the same industry, may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use Adjusted EBITDA or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to our performance. The Company does not, and investors should not, place undue reliance on EBITDA or Adjusted EBITDA as measures of operating performance.

Reconciliation of Net loss attributable to Toys “R” Us, Inc. to EBITDA and Adjusted EBITDA is as follows:



	13 Weeks Ended
(In millions)	April 29, 2017			April 30, 2016
Net loss attributable to Toys “R” Us, Inc.	$	(164	)	$	(126	)

Add:
Income tax expense (benefit)	3			(4		)
Interest expense, net	106			122
Depreciation and amortization	75			80
EBITDA	20			72

Adjustments:
Severance	10			2
Foreign currency re-measurement (a)	5			(13		)
Compensation expense (b)	3			7
Certain transaction costs (c)	3			5
Sponsors’ management and advisory fees (d)	2			2
Net earnings attributable to noncontrolling interest	1			1
Litigation (e)	—			4
Property losses, net of insurance recoveries (f)	—			(1		)
Adjusted EBITDA (g)	$	44		$	79


(a)	Represents the unrealized loss (gain) on foreign exchange related to the re-measurement of the portion of the Tranche A-1 loan facility attributed to Toys-Canada.


(b)	Represents the incremental compensation expense related to certain one-time awards and modifications, net of forfeitures of certain officers’ awards.


(c)	Represents expenses associated with the transition of our U.S. e-commerce operations and other transaction costs.


(d)	Represents the fees expensed to our Sponsors in accordance with the advisory agreement.


(e)	Represents certain litigation expenses and settlements recorded for legal matters.


(f)	Represents property losses and insurance claims recognized.

(g)

Adjusted EBITDA is defined as EBITDA (earnings (loss) before net interest income (expense), income tax expense (benefit), depreciation and amortization), as further adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance including certain items which are generally non-recurring. We have excluded the impact of such items from internal performance assessments. We believe that excluding items such as Sponsors’ management and advisory fees, asset impairment charges, severance, impact of litigation, store closure costs, noncontrolling interest, net gains on sales and other charges, helps investors compare our operating performance with our results in prior periods. We believe it is appropriate to exclude these items as they are not related to ongoing operating performance and, therefore, limit comparability between periods and between us and similar companies.

Liquidity and Capital Resources

Overview

As of April 29, 2017, we were in compliance with all of the covenants related to our outstanding debt. Under the $1.85 billion secured revolving credit facility (“ABL Facility”), 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 among other assets, and generally peaks in the third quarter of our fiscal year. As of April 29, 2017, Toys “R” Us – Delaware, Inc. and its subsidiaries had total liquidity of $211 million, which included cash and cash equivalents of $35 million.

Toys “R” Us – Japan, Ltd. (“Toys-Japan”) 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). 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). As of April 29, 2017, we had no outstanding borrowings under Tranche 2, with $85 million of remaining availability. As of April 29, 2017, Toys-Japan had total liquidity of $214 million under committed facilities, which included cash and cash equivalents of $44 million.

Our European and Australian asset-based revolving credit facility as amended (the “European ABL Facility”) provides for a five-year £138 million ($179 million at April 29, 2017) asset-based senior secured revolving credit facility. As of April 29, 2017, we had outstanding borrowings of $52 million, with $54 million of remaining availability under the European ABL Facility. As of April 29, 2017, Europe and Australia had total liquidity of $114 million, which included cash and cash equivalents of $60 million.

Toys (Labuan) Holding Limited (“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 and $4 million of bank guarantees issued under these facilities. The remaining availability under these facilities was $28 million.

We are dependent on the borrowings provided by our 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 ABL Facility through March 2019, subject to an earlier springing maturity, our Toys-Japan unsecured credit lines with a tranche expiring June 2017 and a tranche expiring June 2018 and our European ABL Facility through December 2020. In addition, Asia JV and Toys-Japan have uncommitted lines of credit, which are due on demand. If our cash flow and capital resources do not provide the necessary liquidity, it could have a significant negative effect on our results of operations.

In general, our primary uses of cash are providing for working capital purposes (which principally represents the purchase of inventory), servicing debt, enhancing information technology, remodeling existing stores, financing construction of new stores and paying expenses, such as payroll costs and rental expense, to operate our stores. Our working capital needs follow a seasonal pattern, peaking in the third quarter of the year when inventory is purchased for the fourth quarter holiday selling season. Our largest source of operating cash flows is cash collections from our customers. We have been able to meet our cash needs principally by using cash on hand, cash flows from operations and borrowings under our revolving credit facilities and credit lines.

Although we believe that cash generated from operations, along with our existing cash, revolving credit facilities and credit lines will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next 12 months, financial market disruption could have a negative impact on our ability to refinance our maturing debt and available resources in the future.

As of April 29, 2017, we had approximately $446 million of debt maturities before the end of fiscal 2018, which were primarily comprised of the Incremental secured term loan facility of $125 million and Second incremental secured term loan facility of $63 million maturing in May of 2018, and 7.375% senior notes of $208 million maturing in October of 2018. We believe we will have the ability to refinance this debt, a portion of which may be repaid using cash on hand; however, a number of factors including factors beyond our control could reduce or restrict our ability to refinance these debt obligations on favorable terms.

We continue to work with Lazard and have engaged them as our advisor to assist us in connection with a potential debt refinancing to address these upcoming maturities.

Capital Expenditures

A component of our long-term strategy is our capital expenditure program. Our capital expenditures are primarily for enhancing our e-commerce and other information technology and logistics systems, as well as improving existing stores and construction of new stores. Capital expenditures are funded primarily through cash provided by operating activities, as well as available cash.

The following table presents our capital expenditures for the thirteen weeks ended April 29, 2017 and April 30, 2016:



	13 Weeks Ended
(In millions)	April 29, 2017		April 30, 2016
Information technology	$	16	$	16
Store improvements	7		15
New stores	5		6
Distribution centers	4		7
Other store-related projects (1)	7		6
Total capital expenditures	$	39	$	50


(1)	Includes remodels and other store updates.

Cash Flows



	13 Weeks Ended
(In millions)	April 29, 2017			April 30, 2016			Change
Net cash used in operating activities	$	(657	)	$	(744	)	$	87
Net cash used in investing activities	(40		)	(48		)	8
Net cash provided by financing activities	428			546			(118		)
Effect of exchange rate changes on Cash and cash equivalents	4			24			(20		)
Net decrease during period in Cash and cash equivalents	$	(265	)	$	(222	)	$	(43	)

Cash Flows Used in Operating Activities

Net cash used in operating activities decreased by $87 million to $657 million for the thirteen weeks ended April 29, 2017, compared to $744 million for the thirteen weeks ended April 30, 2016. The decrease was primarily due to a reduction in Domestic merchandise purchases and annual bonus payments, partially offset by a decline in operating performance.

Cash Flows Used in Investing Activities

Net cash used in investing activities decreased by $8 million to $40 million for the thirteen weeks ended April 29, 2017, compared to $48 million for the thirteen weeks ended April 30, 2016, primarily due to an $11 million decrease in capital expenditures.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities decreased by $118 million to $428 million for the thirteen weeks ended April 29, 2017, compared to $546 million for the thirteen weeks ended April 30, 2016. The decrease was primarily due to a $130 million decrease in net long-term debt borrowings primarily under our revolving credit facilities, partially offset by a $12 million distribution to the Asia JV’s minority interest partner in fiscal 2016.

Debt

As of April 29, 2017, we had total indebtedness of $5.2 billion, of which $3.9 billion was secured indebtedness. During the thirteen weeks ended April 29, 2017, there were no significant events that occurred with respect to our debt structure. Refer to Note 2 to our Condensed Consolidated Financial Statements entitled “Short-term borrowings and long-term debt” for further details regarding our debt.

Our ability to refinance our indebtedness on favorable terms, or at all, is directly affected by global economic and financial market conditions and other economic factors that may be outside our control. Such refinancings may include the issuance or guarantee of debt by certain of our subsidiaries, and may be accompanied by transactions or asset transfers among certain of our subsidiaries. Any debt issued in such transactions may be issued or guaranteed by entities that are not obligors on the debt being refinanced, and may have liens on assets that are not pledged to secure the debt being refinanced.

In addition, our ability to incur secured indebtedness (which may enable us to achieve better pricing than the incurrence of unsecured indebtedness) depends in part on the covenants in our credit facilities and indentures and the value of our assets, which depends, in turn, on the strength of our cash flows, results of operations, economic and market conditions and other factors.

We and our subsidiaries, as well as the Sponsors or their affiliates, may from time to time prepay, repurchase, refinance or otherwise acquire debt or debt securities issued by us or our subsidiaries in open market transactions, tender offers, exchange offers, privately negotiated transactions or otherwise. Any such transactions, and the amounts involved, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Refer to Note 8 to our Condensed Consolidated Financial Statements entitled “Related party transactions” and Note 16 to our Consolidated Financial Statements entitled “RELATED PARTY TRANSACTIONS” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

Contractual Obligations

Our contractual obligations consist mainly of payments related to Long-term debt and related interest, operating leases related to real estate used in the operation of our business and product purchase obligations. Refer to the “Contractual Obligations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 for details on our contractual obligations.

Critical Accounting Policies

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical experience and on other factors that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and could have a material impact on our Condensed Consolidated Financial Statements. Refer to the Annual Report on Form 10-K for the fiscal year ended January 28, 2017 for a discussion of critical accounting policies.

Recently Adopted Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-17 “Consolidation (Topic 810), Interests Held Through Related Parties That Are Under Common Control” (“ASU 2016-17”). ASU 2016-17 changes how a single decision maker will consider its indirect interests when performing the primary beneficiary analysis under the variable interest entity (“VIE”) model. Under previous guidance, a single decision maker was required to consider an indirect interest held by a related party under common control in its entirety. Under ASU 2016-17, the single decision maker will consider the indirect interest on a proportionate basis. ASU 2016-17 does not change the characteristics of a primary beneficiary in the VIE model. The Company adopted the amendments of ASU 2016-17, effective January 29, 2017. The adoption of ASU 2016-17 did not have an impact on our Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09 “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under previous practice, it was not specified how these cash flows should be classified. In addition, companies will now have

to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The Company adopted the amendments of ASU 2016-09, effective January 29, 2017. The Company has elected to recognize forfeitures as they occur and the cumulative effect adjustment of that change in accounting policy has a nominal impact on our Condensed Consolidated Financial Statements. The remaining provisions of ASU 2016-09 did not have a material impact on our Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-07 “Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 eliminates the requirement that when an investment subsequently qualifies for use of the equity method as a result of an increase in level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. This ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and to adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. In addition, ASU 2016-07 requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The Company adopted the amendments of ASU 2016-07 as of January 29, 2017 on a prospective basis. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-06 “Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”). ASU 2016-06 clarifies the requirements for assessing whether contingent put or call options that can accelerate the payment of principal on debt instruments are clearly and closely related. Under previous practice, two divergent approaches developed. Under the first approach, the assessment of whether contingent put or call options are clearly and closely related to the debt host only requires an analysis of the four-step decision sequence of Accounting Standards Codification (“ASC”) 815-15-25-42. Under the second approach, in addition to the four-step decision sequence of ASC 815-15-2-42, some entities evaluate whether the ability to exercise the put or call options are triggered by the entities interest rates or credit risk. ASU 2016-06 clarifies that an entity is required to assess whether the economic characteristics and risks of embedded put or call options are clearly and closely related to those of their debt hosts only in accordance with the four-step decision sequence of ASC 815-15-2-42. An entity should not assess whether the event that triggers the ability to exercise a put or call option is related to interest rates or credit risk of the entity. ASU 2016-06 does not change the existing criteria for determining when bifurcation of an embedded put or call option in a debt instrument is required. Entities are required to apply the guidance to existing debt instruments using a modified retrospective transition method as of the period of adoption. The Company adopted the amendments of ASU 2016-06, effective January 29, 2017. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-05 “Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”). ASU 2016-05 provides guidance clarifying that the novation of a derivative contract (i.e. a change in counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. This ASU amends ASC 815 to clarify that such a change does not, in and of itself, represent a termination of the original derivative instrument or a change in the critical terms of the hedge relationship. ASU 2016-05 allows the hedging relationship to continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterpart to the derivative contract is considered. Entities may adopt the guidance prospectively or use a modified retrospective approach. The Company adopted the amendments of ASU 2016-05, effective January 29, 2017. The adoption of ASU 2016-05 did not have an impact on our Condensed Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, the other reports and documents that we have filed or may in the future file with the Securities and Exchange Commission and other publicly released materials and statements, both oral and written, that we have made or may make in the future, may contain “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such disclosures are intended to be covered by the safe harbors created thereby. These forward looking statements reflect our current views with respect to, among other things, our operations and financial performance. All statements herein or therein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases, such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “believe,” “intend,” “foresee,” “forecast,” “will,” “may,” “outlook” or the negative version of these words or other similar words or phrases. These statements discuss, among other things, our strategy, our “Strategic Pillars,” store openings, integration and remodeling, the development, implementation and integration of our e-commerce business, future financial or operational performance, projected sales for

certain periods, same store sales from one period to another, cost savings, results of store closings and restructurings, outcome or impact of pending or threatened litigation, domestic or international developments, amount and allocation of future capital expenditures, growth initiatives, inventory levels, cost of goods, selection and type of merchandise, marketing positions, implementation of safety standards, access to trade credit, future financings, refinancings and debt repayments, estimates regarding future effective tax rates, future interest payments, and other goals and targets and statements of the assumptions underlying or relating to any such statements.

These statements are subject to risks, uncertainties and other factors, including, among others, the seasonality of our business, competition in the retail industry, changes in our product distribution mix and distribution channels, general economic factors in the United States and other countries in which we conduct our business, consumer spending patterns, birth rates, our ability to implement our strategy including implementing initiatives for season, our ability to recognize cost savings, implementation and operation of our new e-commerce platform, marketing strategies, the availability of adequate financing, ability to repatriate cash from our foreign operations, ability to distribute cash from our operating subsidiaries to their parent entities, access to trade credit, changes in consumer preferences, changes in employment legislation, our dependence on key vendors for our merchandise, political and other developments associated with our international operations, costs of goods that we sell, labor costs, transportation costs, domestic and international events affecting the delivery of toys and other products to our stores, product safety issues including product recalls, the existence of adverse litigation, changes in laws including tax that impact our business, our substantial level of indebtedness and related debt-service obligations, restrictions imposed by covenants in our debt agreements and other risks, uncertainties and factors set forth under Item 1A entitled “RISK FACTORS” of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, and in our other reports and documents filed with the Securities and Exchange Commission. In addition, we typically earn a disproportionate part of our annual operating earnings in the fourth quarter as a result of seasonal buying patterns and these buying patterns are difficult to forecast with certainty. These factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this report. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update these statements in light of subsequent events or developments unless required by the Securities and Exchange Commission’s rules and regulations. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in any forward-looking statement.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There has been no significant change in our exposure to market risk during the thirteen weeks ended April 29, 2017. For a discussion of our exposure to market risk, refer to Item 7A entitled “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.


Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our first quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.	Legal Proceedings


Item 1A.	Risk Factors

As of the date of this report, there have been no material changes to the information related to Item 1A entitled “RISK FACTORS” disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

None.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.


Item 5.	Other Information

None.


Item 6.	Exhibits

See the Index to Exhibits immediately following the signature page hereto, which Index to Exhibits is incorporated herein by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		TOYS “R” US, INC.
		(Registrant)

Date: June 13, 2017		/s/ Michael J. Short
		Michael J. Short
		Executive Vice President – Chief Financial Officer

INDEX TO EXHIBITS



Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on June 10, 2008 (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q, filed on June 10, 2008 and incorporated herein by reference).

3.2		Amendment No. 1 to the Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on June 3, 2015 (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on June 12, 2015 and incorporated herein by reference).

3.3		Amendment No. 2 to the Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on March 22, 2016 (filed as Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016, filed on March 24, 2016 and incorporated herein by reference).

3.4		Amended and Restated By-Laws of the Registrant, dated June 10, 2008 (filed as Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q, filed on June 10, 2008 and incorporated herein by reference).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) and Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) and Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Attached files

TOYS R US INC Reports

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