Net Income Increases to $27 Million in 2009 Second Quarter from $13 Million in 2008 Second Quarter

WAYNE, N.J. -- September 04, 2009 -- Toys"R"Us, Inc. today reported results for its second quarter beginning May 3, 2009 and ending August 1, 2009.

Consolidated Financial Results

Net earnings increased to $27 million for the second quarter of fiscal 2009, compared to $13 million for the second quarter of fiscal 2008. Operating earnings increased to $86 million for the second quarter of fiscal 2009, compared to $79 million for the second quarter of fiscal 2008.

"We are pleased with our performance for the first half of this year and believe our results clearly demonstrate that we can successfully operate and achieve results in any economic environment. Our second quarter results delivered on our expectations, and the team did a great job growing margin rate while managing expenses," said Jerry Storch, Chairman and CEO, Toys"R"Us, Inc.

"At the same time, we remain aggressive in positioning the company for long-term growth and increasing our market share as the leading specialty toy and baby products retailer. In the second quarter, we announced the acquisition of the legendary FAO Schwarz. This followed our first quarter strategic acquisitions of eToys.com, babyuniverse.com, ePregnancy.com and Toys.com. And, just this week, we added KB Toys to our growing portfolio of family-friendly brands.

"We continue to make prudent capital investments to expand our business, domestically and around the world. During the second quarter, we added two "R" Superstores and completed nine side-by-side store conversions in the U.S. We also opened four new Toys"R"Us stores internationally," continued Mr. Storch.

Net sales during the second quarter of fiscal 2009 were $2.567 billion, compared to $2.771 billion for the second quarter of fiscal 2008. Foreign currency translation contributed to $59 million of this decrease. Comparable store net sales decreased by 7.2% and 3.9% in the second quarter of fiscal 2009 for our Domestic and International segments, respectively. The majority of the decline in net sales was in the entertainment products category, specifically video game hardware and software, driven by the industry-wide weakness of those businesses.

Higher-margin products sold much better than lower-margin video games. This is reflected in the improved gross margin rate of 37.0%, which represents an increase from 36.6% in the second quarter of fiscal 2008. SG&A expense for the quarter decreased by 6.4%, or $57 million. The favorable SG&A comparison benefited from $22 million related to foreign currency translation.

Other income increased to $64 million in the second quarter of fiscal 2009, compared to $53 million in the second quarter of the prior year. The second quarter of fiscal 2009 included a $51 million gain from a litigation settlement with Amazon.com, and the second quarter of fiscal 2008 included a $39 million gain on the liquidation of our Hong Kong subsidiary.

Adjusted EBITDA for the second quarter of fiscal 2009 was $145 million, compared to $147 million in the second quarter of fiscal 2008. A detailed description and reconciliation of EBITDA and adjusted EBITDA are set forth at the end of this press release.

Interest rates on borrowings were down for the second quarter compared to the same period in fiscal 2008. The increase in net interest expense to $115 million compared to $96 million in the second quarter of fiscal 2008 was driven by changes in the fair value of derivatives which do not qualify for hedge accounting and the write-off of deferred fees related to the repayment of the company's unsecured credit agreement. Income tax benefit increased by $28 million, which was primarily attributable to the reversal of deferred tax liabilities associated with undistributed earnings of one of our non-U.S. subsidiaries that are now considered to be invested indefinitely.

Storch continued, "During this quarter, we were very pleased to have completed both the $950 million senior unsecured note offering and the extension of our secured revolving credit facility. The execution of these two transactions has well positioned us to address our remaining obligations that mature in the future."

The company ended the second quarter of fiscal 2009 with cash and unused credit lines of approximately $1.543 billion, including approximately $98 million that was available to its Japan subsidiary. Long-term debt was lowered by $409 million to $5.496 billion at the end of the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008, primarily due to the pay down and refinancing of the company's $1.3 billion unsecured credit agreement. Capital spending for the quarter decreased $82 million to $93 million, as the company has taken, and continues to take, steps to moderate capital spending prudently in this economic environment. Total inventory at the end of the second quarter was down $29 million or 1.3%, compared to the same period in fiscal 2008.

Financial Results by Segment

Domestic

Net sales for the segment during the second quarter of fiscal 2009 were $1.576 billion, compared to $1.686 billion for the second quarter of fiscal 2008. Comparable store net sales for the Domestic segment decreased 7.2% in the second quarter of fiscal 2009. New and converted store formats performed well and drove sales, providing good returns on capital investments. The consumables business performed very well, and core toy and learning sales performed better than other categories. Driving the decrease in net sales were weaknesses in video game hardware and software, along with the seasonal business, apparel, baby gear, bedding and wooden furniture. Gross margin as a percent of net sales was 36.7% in the second quarter of fiscal 2009, up from 35.9% during the same period in fiscal 2008. The increase in gross margin, as a percentage of net sales, resulted primarily from improvements in product mix and a reduction in the use of clearance pricing within the apparel category.

International

Net sales for the segment during the second quarter of fiscal 2009 were $991 million, compared to $1.085 billion for the second quarter of fiscal 2008. For the second quarter of fiscal 2009, the International segment reported a decrease in comparable store net sales of 3.9%, driven primarily by decreases in the entertainment products category, largely attributable to a decrease in sales of video game hardware and software. Gross margin as a percent of net sales declined by one-tenth of a percent over the same period last year.

Further information regarding the company's financial performance in the second quarter of fiscal 2009 is presented in its Interim Report on Form 10-Q, which was filed with the Securities and Exchange Commission on September 4, 2009.

About Toys"R"Us, Inc.

Toys"R"Us, Inc. is the world's leading dedicated toy and baby products retailer, offering a differentiated shopping experience through its family of brands. It currently sells merchandise in more than 1,550 stores, including 847 Toys"R"Us and Babies"R"Us stores in the United States, and more than 700 international stores in 33 countries, consisting of both licensed and franchised stores. In addition, it sells extraordinary toys in two FAO Schwarz stores in the United States. With its strong portfolio of e-commerce sites including Toysrus.com, Babiesrus.com, eToys.com, FAO.com and babyuniverse.com, it provides shoppers with an unparalleled online selection of distinctive toy and baby products. In addition, the company operates ePregnancy.com, an online resource for parents. Headquartered in Wayne, NJ, Toys"R"Us, Inc. employs nearly 70,000 associates worldwide. The company is committed to serving its communities as a caring and reputable neighbor through programs dedicated to keeping kids safe and helping them in times of need.