QUOTE OF THE DAY
We will continue to support Toys “R” Us as they restructure their business.”
Toymaker Spin Master’s COO Ben Gadbois has got Toys “R” Us’ back after it filed for chapter 11. Toys aren’t always fun and games.
Market Snapshot
- U.S. indexes finished higher on day 1 of the Fed’s meeting.
- Bed Bath & Beyond missed earnings—shares fell 18% after hours.
- Harvard’s endowment fund returned a disappointing 8.1% this year.
- Ray Dalio called Bitcoin a bubble.
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It’s a Bad Day to Be a Toy
Toys “R” Us, the multicolored toy emporium, is seeking $3 billion in bankruptcy financing and is restructuring with over $5 billion in debt.
This is just the latest of 20+ brick-and-mortar retailers to declare Chapter 11 in 2017.
And with $6.6 billion in assets, the toy company is recording the second largest retail bankruptcy ever (behind Kmart, which held $16.3 billion in assets).
How we got here
The signs of an impending Chapter 11 have been lingering since early 2005, when Vornado Trust, Bain Capital, and KKR paid $6.6 billion to take Toys “R” Us private.
Since 1993, Walmart (11% market share of the toy business at the time) had been chipping away at Toys “R” Us’ 21% share and cost advantage. So by the time the PE trio got their hands on it, Walmart had strengthened its grip further (Walmart—25% & Toys “R” Us—11%).
And while its time on the private market sparked a glimmer of hope with more stores and a stronger top line, Toys “R” Us was not immune from the Amazon effect. The retailer has posted five straight years of sales decline. Not to mention losing $36 million in 2016 on $11.5 billion in sales.
Moving forward
Toys “R” Us might look to focus on its best-performing domestic unit, Babies “R” Us, which contributes 35% of domestic revenue. That way it can better withstand the post-Christmas blues (holiday season accounts for 40% of the company’s sales).
Rest assured, you’ll still be able to get your hands on the new Easy-Bake Ultimate (yummy mixing pan included), but Toys “R” Us’ ecosystem of 1,700 stores and nearly 65,000 employees will start to look a little different. For starters, its stores will be reconfigured to be smaller and experience focused.
And with fewer shelves and more play area, maybe Mr. Potato Head still has a fighting chance.
The Definitive FOMC Preview (With Spoilers)
Cure your Apple event hangover with the business world’s next best jamboree…the meeting of the FOMC (Federal Open Market Committee). But expect fewer Animojis and more in-depth chatter around national monetary policy.
Here’s what we’ll be watching for:
The Great “Unwinding.” When the financial crisis hit nearly a decade ago, the Fed rapidly grew its debt load by buying Treasury bonds and mortgage-backed securities with hopes of stimulating a battered economy. This meeting might signal the beginning of the “big sell-off” of the Fed’s $4.5 trillion balance sheet.
What’s the status of Janet Yellen? The Wise Dame of Wall St. is finishing up her 4-year term as Fed chair this February. President Trump hasn’t set a clear signal on her status one way or another…so we’ll continue to keep tabs.
What are the chances of a rate hike? Low. Economic growth and the unemployment rate are at acceptable levels, but a lower-than-expected inflation rate (and hurricane damage) should keep rates unchanged.
Sprint to the Finish
T-Mobile and Sprint have been flirting with a merger for almost three years. Nothing is finalized, but new terms have come to light: the deal would be a stock-for-stock merger and T-Mobile’s CEO John Legere would lead the new company.
Here’s what’s interesting—when these companies first hashed out the deal, Sprint was bigger than T-Mobile and Sprint’s parent SoftBank wanted to buy it outright. Now? Not so much. T-Mobile sprinted past Sprint’s $30 billion market cap to hit $51 billion.
And that’s exactly why T-Mobile’s parent Deutsche Telekom—and not SoftBank—would own the controlling stake if the ink ever dries (a marriage between the No. 3 and No. 4 wireless carriers could be a red flag for antitrust regulators).
Of course, SoftBank CEO Masayoshi Son isn’t used to things not going his way, but with Sprint’s $33 billion debt load, sometimes you take what you can get.
Evolv(o)ing Down South
Volvo is doubling down on its investment in a South Carolina manufacturing plant, bumping what was a $500 million project up to $1 billion and hiring 1,900 more workers than it originally planned.
What’s all the chest-thumping about? Volvo boasted record sales in 2016, and it wants to ride the wave by increasing its light vehicle sales 2x by 2020. That’ll start right here in the U.S., with South Carolinian production lines churning out 100,000 S60 sedans per year beginning in late 2018.
The location of this plant is no accident. Volvo is just one of several foreign automakers which make cars in the American South. Nissan builds its electric vehicle, the LEAF, 30 minutes outside of Nashville, and BMW operates its largest final assembly plant in the world up I-26 in Spartanburg, SC. What’s behind the southern migration? You can thank lucrative tax incentives and lax labor laws.
Cars and grits for everyone!
What Else Is Happening…
- Walgreens received approval to buy 1,932 Rite Aid stores for $4.38 billion.
- Nintendo partners with Tencent to put Honor of Kings on Nintendo Switch.
- Fiat Chrysler is recalling almost 500,000 pickup trucks because of a fire risk.
- Taiwanese electric scooter company Gogoro raised $300 million.
Economic Calendar
- Monday Earnings: No Events
- Tuesday Earnings: Adobe (+), Bed Bath & Beyond (-), FedEx (-)
- Wednesday Earnings: General Mills
- Thursday Earnings: YogaWorks
- Friday Earnings: No Events
Economic Events: Housing Market Index (-)
Economic Events: Import and Export Prices (+)
Economic Events: MBA Mortgage Applications, Existing Home Sales, FOMC Forecasts, Petroleum Status
Economic Events: Jobless Claims, House Price Index, Consumer Comfort, Fed Balance Sheet
Economic Events: PMI, Baker-Hughes Rig Count
Brewified Terms
Corporate Venture Capital
What is it?
Corporate Venture Capital (CVC) is the process by which larger corporations take an equity stake in startup companies. Keep in mind: investments are not placed through third-party VCs but instead are internal units of corporations. And CVCs are popular: 41 companies in the Fortune 100 have a dedicated CVC team.
Why so popular?
Let’s separate CVC investments into two categories:
- Strategic—A large corporation invests in a company in which the two have existing synergies. A relevant case would be Intel’s fund, Intel Capital, which has poured more than $1 billion into AI startups…companies that can use Intel’s tech.
- Financial—A corporate parent makes the investment with the specific purpose of earning attractive returns. Some investments by SoftBank’s Vision Fund (like WeWork and ride-hailing) don’t directly relate to its core business, but they could be lucrative.
Let’s see an example
Tencent, the Chinese internet giant, reported massive earnings in Q2. But while much attention was directed to its super-popular video game, Honor of Kings, the real moneymaker lied elsewhere: namely, in Tencent’s investments in startups. The revaluation of its stakes in fintech and bike rental businesses helped it report net income that beat expectations by 35%.
A step further
- SoftBank’s $93 billion Vision Fund has captured all the headlines recently. But it doesn’t operate quite like a traditional CVC fund. Here’s why.
- Get insight into what it’s like to run Google’s $2 billion investment arm, called Google Ventures.
The Breakroom
Question of the Day
In a local intramural basketball league, there are 10 teams and each team plays every other team exactly one time. Assuming that each game is played by only two teams, how many games are played in total?
Business Trivia
What is the one company that was a part of the original Dow 12 and is still in the Dow today?
Stat of the Day
$1 trillion–The size of Norway’s pension fund. The fund owns nearly $667 billion worth of stock in over 9,000 companies around the world.
