Turnarounds ‘R Us

US retailer Toys ‘R Us made headlines last year when it was purchased by a private equity consortium, including firms Kohlberg Kravis Roberts and Bain Capital, as well as Vornado Realty Trust. The transaction, a big private equity retail deal in a year full of big private equity retail deals, was valued at more than $6.6 billion (€5.5 billion).
 
In any private equity deal, management is important – particularly a turnaround situation. So it was no surprise when, last week, a once-fierce competitor was named to bring the beleaguered toy retailer back on track.
 
Gerald Storch, who has a background in technology and finance, rather than just merchandising, will take over as Toys ‘R Us’ chief executive officer and chairman, filling in for John Eyler, who left last summer. Since 2001, Storch was the vice chairman at Minnesota-based discount retailer Target. He joined the firm in 1993 as a senior vice president of strategic planning, eventually becoming president of financial services and new business. Prior to Target, Storch was a principal at consulting firm McKinsey.
 
Using his financial background, Storch was able to make a number of positive changes in retail operations during his tenure at Target. For example, Storch streamlined the retailer’s supply chain and improved its website, which, last fall, he claimed got more traffic than the site of larger rival Wal-Mart. While at Target, he also worked on the expansion of the company’s line of Super Target stores, which carry groceries in addition to clothing, toys and consumer goods.
 
Analysts say Target is getting close to snatching the number two toy-retailer spot from Toys ‘R Us, a situation that now puts Storch in competition against his former company.
 
Since 1998, Wal-Mart has been the industry leader in the US toy market with a reported 22 percent market share, while Toys ‘R Us retains around 17 percent of the sector. The toy chain has also been suffering from a decrease in sales; late last year, Toys ‘R Us reported that sales for existing stores were down 8.9 percent.
 
Going with a technology and financial expert is a decidedly different tack from the one taken by New York-based hedge fund Cerberus Capital Management. Last spring, the firm hired former JC Penney executive and turnaround expert Vanessa Castagna to run portfolio company Mervyn’s, a discount retail chain the firm acquired from Target. A retail veteran at the executive level, Castagna has plenty of experience across a number of high-profile chains, including Target, Marshall’s and Lazarus, a store under the Federated banner.
 
Whichever strategy private equity firms plump for, so long as they are scooping up troubled retail firms, the search for quality executives to run them will continue – and hopefully these executives know something about retail or turnaround situations.