Toys ‘R’ Us, the leading global retailer of dedicated toys and baby products, intends to file for an initial public offering (IPO) in April 2011. Insiders familiar with the event expect it to raise about $800 million from the IPO. Toys ‘R’ Us had earlier planned to file for an IPO in May 2010, but later discarded the plan.
The strategic move is the latest ploy by the string of private equity firms that owns Toys ‘R’ Us, to capitalize on their investments by selling their holdings and benefit from the rise in the stock price. In 2005, Toys ‘R’ Us was acquired by KKR Financial Holdings LLC (KFN), Bain Capital and Vornado Realty Trust (VNO) for $6.6 billion.
The business of Toys ‘R’ Us is highly seasonal with fourth quarter accounting for over 80% of the fiscal net income, primarily due to strong holiday sales. In December 2010, Toys ‘R’ Us reported 5.4% growth in total sales in the U.S. with an exclusive range of toys and an increased number of temporary stores that lured holiday shoppers away from No. 1 toy retailer Wal-Mart Stores Inc. (WMT).
The New Jersey-based toy retailer has reportedly captured more market share from its rivals in 2010 than it has in the last 20 years of its operations. Consequently, management of the company firmly believes that this would be the best possible time to re-launch the IPO to capitalize on its rising popularity.
New York-based Vornado Realty is one of the largest real estate investment trusts (REIT) in the U.S., engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us. Vornado Realty currently owns about 32.7% of Toys ‘R’ Us.
Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S.– New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The company also has a healthy balance sheet and adequate liquidity.
We maintain our long-term Neutral rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.
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