Bain Capital and Toys R Us
From Gifts and Dec
This is the last of a three part series on Bain Capital. Some have questioned the need for me to write about Bain. My response is in the form of a question: Why should the toy industry be the only segment of the population not discussing a major toy retailer that has become an issue in the election?
Rather than just looking at KB Toys, however, I think it is more important to consider Bain Capital as a major player in the toy industry for over 10 years. Owing the number 1 (Toys R Us) and having owned the number 2 (KB Toys) toy chains certainly makes it a rival to Wal-Mart in shaping the toy markets. It seems to me a fair question to ask is: Has Bain Capital been good for the toy industry? Has the toy industry been good for Bain Capital?
In my last posting, "Bain Capital and Toys R Us," we took a look at Toys R Us. In this article we look at KB Toys.
Analyzing the relationship between KB and Bain is a challenge. Any strong emotions that may have previously existed have been exacerbated by an election in which Venture Capital companies like Bain have become an issue. In addition, between the two bankruptcies, a lot of people lost jobs (6400 between the two bankruptcies) and many companies lost money. This in turn creates strong feelings.
Some of you have been in the toy industry long enough to remember when KB (Kay-Bee) was a major player in the toy industry with some of the sharpest people and toughest negotiators in the business (if you ever called on KB you know what I mean); as good as they were, times passed them by.
KB was purchased by Bain in 2000. The company subsequently filed for bankruptcy in 2004 and was purchased out of bankruptcy by Prentice Capital Management in 2005. KB ceased to exist in 2008.
What complicates all of this is that there are a number of variables involved in KB's ultimate demise:
The business model
Some question whether KB's business model was still viable. Here is how Obit magazine described the company's demise in 2008:
"The growth and expansion of Wal-Mart offered the latest toys at deep discounts ... Toys "R" Us ...emerged stronger than ever [and] simultaneously, grocery stores, drug chains and mid-tier retailers like Target and Kohl's also became players in the business. KB, averaging a minuscule 1,300 square foot per store, couldn't compete on price or selection...As mall traffic has dwindled and the economy sunk deeper into recession, the toy industry has been more resilient than most. But it still is an item-driven business, powered by the specific requests and interests of children and not just by price. That wasn't' KB's business model. They were ultimately overwhelmed by too many factors from size of stores to ability to stock goods to new economic realities..."
The debt load
Bain's style was to pay little in the way of cash and borrow the rest. In the case of KB, Bain paid $18 million in cash and borrowed $302 million. According to The New York Times "Just 16 months later, the toy company borrowed more to pay Bain and its investors an $85 million dividend." Some feel that it was this debt load that led to the subsequent 2004 bankruptcy.
KB was leaner and meaner
Others feel that Bain made good moves by closing underperforming stores and letting employees
go. This made the company more competitive and allowed it to keep operating. Yes, some lost jobs but many others did not.
Still others feel that it was the recession. The economic collapse in 2008 was just too much for KB. GE Capital chose to end KB's line of credit. That forced the company into bankruptcy.
So, was Bain Capital good for KB and was KB good for Bain Capital? It would appear, based upon The New York Times article cited above, KB was ultimately good for Bain Capital. The principals appear to have made money on their investment.
Was Bain good or bad for KB? I think that the question is too complicated to assign blame to any one party. The debt load certainly contributed to the company's demise but bigger factors were beyond anyone's control: The struggling macro economy and basic changes in how Americans shopped just to name two.
Overall, Bain Capital has had a major impact on the toy industry. To what degree it has been good or bad is open to debate. What cannot be debated is that Bain Capital has since 2000 made a big difference in the lives of toy industry individuals and companies.