Giant Internet investor Softbank gave Toys “R” Us (NYSE: TOY) a much needed vote of confidence Thursday by announcing that it will take a $57 million (US$) minority stake in the toy maker’s Toysrus.com online subsidiary.
The move comes at a crucial time for Toys “R” Us, whose stock has been languishing near all-time lows recently. The toy retailer was supplanted last year as the number one brick-and-mortar toy seller by Wal-Mart, and is now behind eToys and Amazon.com in online toy sales.
Tough Christmas Season for ‘Toys’
Toys “R” Us just completed a sour online Christmas shopping season, as it failed to deliver toys on time to several thousand customers. The company was forced to offer $100 gift certificates to disappointed families, but the gesture was not enough to offset the negative publicity and an eventual class action lawsuit.
However, the Christmas season was not all gloom and doom. In early 1999, Toys “R” Us teamed up with Benchmark Capital to fund its online business and attempt to catch up with eToys, but the agreement unraveled over the summer of 1999.
As the E-Commerce Times reported throughout 1999, executive shakeups came in response to these difficulties. The company hired John Barbour in September 1999 as CEO of Toysrus.com and committed $80 million to develop the site.
The online subsidiary then staged a spectacular comeback that saw it generate an estimated $39 million in revenues in the fourth quarter of 1999.
The company’s decision to accept orders too far into the season, however, unraveled a lot of the progress that had been made.
Handling the Investment
Toysrus.com said it will use the investment from Softbank to support infrastructure improvements as its gears up for continued growth — and to further distance itself from the holiday season failures.
Like other observers, Softbank seems to believe that Toys “R” Us can use its massive brick-and-mortar presence and resources to propel its online business forward. Toys “R” Us has 710 stores in the U.S., an additional 462 stores overseas, 205 Kids “R” Us stores, and 132 Babies “R” Us stores. The company booked 1999 sales of more than $11 billion.
With a market capitalization of just $2.7 billion, Toys “R” Us represents a bargain to Softbank. As part of the deal, the Japanese Internet investment giant said its two U.S. venture capital funds also purchased warrants for $10 million to buy over one million shares of Toys “R” Us common stock.
Toys “R” Us said that three other private equity companies also made minor investments in its online unit.