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Case 6-3 chapter 6 Financial Statement Analysis 10th k. subramanyam john j. wild On September 16, 20X8, Toys "R" Us [ToysRUs.Com], the world's...

Financial Statement Analysis 10th J.Wild - please help to solve case 6-3 (attached)
Case 6-3 chapter 6 Financial Statement Analysis 10th k.r. subramanyam john j. wild On September 16, 20X8, Toys “R” Us [ ToysRUs.Com ], the world’s largest toy seller, announced strategic initiatives to restructure its business. The total cost to implement these initiatives yielded a charge of $508 million, which exceeded operating earnings from the prior year. The $508 million charge consisted of costs to close and/or downsize stores, distribution centers, and administrative functions to streamline store formats, inventories and supply chains; and for changes in accounting estimates and provisions for legal settlements. These initiatives included the closing of 50 toy stores in the international division, predominantly in continental Europe, and 9 in the U.S. that did not meet the company’s return on investment goals. It also closed 31 Kids “R”Us stores and converted 28 nearby U.S. toy stores into combination stores. Combination stores sell toys and apparel. These initiatives were expected to save more than $75 million in 20X9 and even more in subsequent years. At the time of the restructuring announcement, the company had 116,000 employees and 1,145 stores worldwide. Of the 1,145 stores, 697 are in the U.S. The company also ran 214 Kids “R” Us stores, 101 Babies “R” Us stores, and 2 KidsWorld stores. It hoped to reverse a trend of losing sales toWal-Mart and other discount retailers. Toys “R” Us had an 18.4% U.S. toy market share in 20X7, down from 18.9% in 20X6.Wal- Mart’s share and Target’s share rose from 15.3% to 16.4%, and 6.4% to 7.1%, respectively, during that time. Toys “R” Us selected financial reports follow: Letter to Stockholders Toys “R” Us To Our Stockholders 20X8 was indeed a year of enormous challenge and change. We’ve spent the year intensively reviewing every aspect of our business and making some tough calls aimed at repositioning our worldwide business. Key elements of our strategic plan include a Total Solutions Strategy focused on our C-3 plan, which includes the reformatting and repositioning of our toy stores; development of a customer-driven culture; expanding product development; improving our customer value proposition; accelerating our supply chain management program; and expanding our channels of selling. In conjunction with these restructuring efforts, we have been proactively rebuilding and reshaping a stronger management team which will serve to build the foundation for repositioning your Company in the years ahead. We believe that the sum total of these efforts will serve as the springboard toward implementing our expanded vision for the future: to position Toys“R”Us as the worldwide authority on kids, families and fun. 20X8 Restructuring Benefits We ended 20X8 a much healthier and vibrant company. This was attributable to some tough strategic decisions that will shape the Company’s future. We recorded restructuring and other charges of $508 million net of taxes, which caused the Company to incur a net loss in 20X8. The impact of making these tough calls will be evident in our future operations, growth, and financial performance. These charges are the result of an exhaustive review of all our operations in 20X8 from both a strategic and an Economic Value Added (EVA ® ) perspective. These reviews prompted the following significant actions: • The closing and/or downsizing of approximately 50 toy stores in the International arena, predominantly in continental Europe, and about 9 U.S. toy stores which do not meet the Company’s strategic or financial objectives. This will free our management to focus on higher return opportunities; • The conversion of 28 existing U.S. toy stores into “combo” stores, which will enable us to close 31 nearby Kids “R” Us stores. In addition to reducing operating costs and releasing working capital, this will allow us to enhance our productivity by further expanding kids’ apparel into additional Toys“R”Us stores; • The consolidation of several distribution centers and over half a dozen administrative offices. These actions will reduce administrative support functions in the U.S. and Europe, which will not only generate selling, general and administrative efficiencies, but “flatten” our organization and bring our management even closer to our stores and customers; • The continuation of taking aggressive markdowns on clearance product to optimize inventory levels, accommodate new product offerings and accelerate our store reformatting. In conjunction with the initial stages of our supply chain re-engineering, we have already been 394 Financial Statement Analysis able to reduce same store inventories in all our divisions by over $560 million or 24% at year end 20X8, with roughly $480 million or 31% of this favorable swing coming from reduced inventory in the U.S. toy stores division alone. This brought us into the new year with heightened merchandise flexibility and increased “open to buy” as we begin the rollout of the initial phase of our store reformat program in 20X9. One of our other key priorities in 20X8 was to build a strong executive team, and we are well on our way towards assembling a truly outstanding management team. Since the beginning of 20X8, more than 50 percent of our officer team has either joined the company from the outside,
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or has been promoted or transferred to new assignments, bringing fresh perspectives and proven skills to our business. It is obvious our 20X8 sales and earnings were not what we wanted them to be. However, we’ve spent a year making tough calls and hard decisions, and we’re now ready to move forward stronger and more focused than ever. Total Solutions Strategy Our restructuring program, in September 20X8, was the first step required to launch a winning strategy for Toys “R” Us—a strategy which will realign our assets, organization and thinking based on customer-driven priorities in a more competitive marketplace. In the “R” Us brand, we have one of the best-known brand names in the world: our challenge is to more effectively develop this strong customer franchise potential. Today’s retail marketplace demands stores that are exciting, easy to shop and customer-friendly. While our selection is still superior to our competitors, that alone is not compelling enough to rebuild market share and brand loyalty. We must become more focused on developing greater everyday customer value in terms of price, service, and the total shopping experience. Management’s Discussion and Analysis Results of Operations and Financial Condition During 20X8 the Company announced strategic initiatives to reposition its worldwide business and other charges including the customer-focused reformatting of its toy stores into the new C-3 format, as well as the restructuring of its International operations which resulted in a charge of $353 million ($279 million net of tax benefits, or $1.05 per share). The strategic initiatives resulted in a restructuring charge of $294 million. The other charges of $59 million primarily consist of changes in accounting estimates and provisions for legal settlements. The Company is closing and/or downsizing underperforming stores and consolidating distribution centers and administrative offices. As a result, approximately 2,600 employees will be terminated worldwide. Stores expected to be closed had aggregate store sales and net operating losses of approximately $322 million and $5 million, respectively, for the year ended January 30, 20X9. The write-down of property, plant, and equipment relating to the above mentioned closures and downsizings were based on both internal and independent appraisals. Unused reserves at January 30, 20X9, should be utilized in 20X9, with the exception of long-term lease commitments, which will be utilized in 20X9 and thereafter. Details on the components of the charges are described in the Notes to the Consolidated Financial Statements and are as follows: Description Charge Utilized Reserve Balance Closings/downsizings: Lease commitments . .......................................... $ 81 $ — $ 81 Severance and other closing costs . .................... 29 4 25 Write-down of property, plant & equipment . ....... 155 155 — Other . ................................................................. 29 5 24 Total restructuring . ................................................. $294 $164 $130 Changes in accounting estimates and Provisions for legal settlements . ........................ $ 59 $ 20 $ 39 Chapter Six | Analyzing Operating Activities 395 In 20X8 the Company also announced markdowns and other charges of $345 million ($229 million net of tax benefits, or $.86 per share). Of this charge, $253 million relates to markdowns required to clear excess inventory from stores. These markdowns should enable the Company to achieve its optimal inventory assortment and streamline systems so that it can proceed with the C-3 conversions on an accelerated basis. The Company’s objective with its new C-3 concept is to provide customers with a better shopping experience leading to increased sales and higher inventory turns. In addition, the Company recorded $29 million in markdowns related to the store closings discussed previously. The Company also recorded charges to cost of sales of $63 million related to inventory system refinements and changes in accounting estimates. Unused reserves at January 30, 20X9, are expected to be utilized in 20X9. Details of the markdowns and other charges are as follows: Description Charge Utilized Reserve Balance Markdowns Clear excess inventory . ............................... $253 $179 $ 74 Store closings . ............................................ 29 2 27 Change in accounting estimates & other . ....... 63 57 6 Total cost of sales . .......................................... $345 $238 $107 The strategic initiatives, markdowns, and other charges described above are expected to improve the Company’s free cash flow and increase operating earnings. CONSOLIDATED STATEMENTS OF EARNINGS Toys “R” Us, Inc., and Subsidiaries Year Ended January 30, January 31, February 1, (In millions except per share data) 20X9 20X8 20X7
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