TBT - After 69 years in business, Toys R Us filed for bankruptcy. Two days ago, it announced that all 800 of its American stores, and all 100 of its British ones, are closing or being sold. As many as 33,000 workers could lose their jobs. As recently as last year, the company still accounted […]
TBT - After 69 years in business, Toys R Us filed for bankruptcy. Two days ago, it announced that all 800 of its American stores, and all 100 of its British ones, are closing or being sold. As many as 33,000 workers could lose their jobs. As recently as last year, the company still accounted […]
Good afternoon, and welcome to brunch and budget with your host Pamela Capalad, a certified financial planner here to help take the bite out of your budget brunchandbudget.com. I'm your sound provider Dyalket. And here's your host, Pamela Capalad.
Pamela Capalad, CFP, AFC:Thank you Dyalekt and thank you everybody for tuning in today. So basically our childhood our childhoods died last week. Toys R Us went down. Toys R Us as they're closing all their stores dialect.
Dyalekt:I didn't know that you were raised in Toys R Us. Yes, I was raised
Pamela Capalad, CFP, AFC:from Year Zero to 24. No, I didn't spend that much time toys. Toys a rescue. It's true. No, but for
Dyalekt:real, though. No more Geoffrey the giraffe.
Pamela Capalad, CFP, AFC:Oh my god, that song. It's over.
Dyalekt:No more ferris wheel in Times Square.
Pamela Capalad, CFP, AFC:What are we gonna do consequences?
Dyalekt:This stuff stole stuff.
Pamela Capalad, CFP, AFC:It's true. It's over. I mean, Toys R Us was such a big part of our childhoods. I feel like if you were like if you're between the ages of 20 and 30 and 40, or whatever, Toys R Us has been around for 70 years. They filed for bankruptcy in September. And they officially announced they are closing all of their stores. They announced it this week. And we wanted to talk about who really killed toys r us it wasn't Amazon wasn't Walmart.
Dyalekt:Well, that's the thing is, uh, you know, you immediately start thinking, Well, you know, they just lost out because it's like the blockbuster thing where, oh, man, all the mom and pops are gone because blockbuster went and took over. And blockbuster was the only thing and then when people realized they didn't need any physical stores and blockbuster went away. You know, Netflix, right? Right. Yeah. So I figured the same thing, right? Because I know that families don't have kids, but my relatives who have kids they don't think about Toys R Us is the place they go to buy all of their Christmas shopping and stuff like that,
Pamela Capalad, CFP, AFC:right? No, you're right. No, they're going online but they're also going to lots of other places they are going to the Walmarts and the targets and places like that so
Dyalekt:so even though it's ubiquitous I you know, I can see the narrative why Yeah, toys are when I tell
Pamela Capalad, CFP, AFC:you though, I found this crazy stat. Toys R Us is still even in filing for bankruptcy. 20% of toy sales still come out of Toys R Us. Wow. Or cam came? Oh my god. It's so weird. Yes. So it wasn't Amazon and it wasn't WalMart. We killed Toys R Us. So who was it? Who was it? Was it Pam? That is our that is our mystery for today. But before we get to that, let's do a little investment appetizer. Yeah. All right. So today, our investment appetizer is a leveraged buyout, or LBO, as they say, on the Wall Street. People I don't know LBO
Dyalekt:as they call it in Spanish, the body odor
Pamela Capalad, CFP, AFC:LBO. Amazing, I can't even handle you right now. So a leveraged buyout is basically when a group a private equity firm usually uses debt to acquire another company. So they borrow money to buy out another company, which means so let's say like, you know, what happened with toys r us specifically is three companies said we're gonna buy toys r us for $6.6 billion. But we're only going to put in $1.3 billion of our own money. And the rest of it, we're going to finance so we're financing this by we're leveraging the ability to buy Toys R Us and the crazy part is that the collateral in a leveraged buyout is the company that they are buying. So Toys R Us was the collateral for the debt that these this private equity or these private equity firms used to buy toys r us?
Dyalekt:How do you do that? Like I get? I get buy in a company, right? I get taken a loan to buy a company. Yep. But when you take a loan to buy a company, you got to put up collateral like I've bought stuff before. Yeah, I've when you buy a house, right? Yeah, you have to put up stuff that that says you're going to be able to pull up the stuff
Pamela Capalad, CFP, AFC:because when you when you buy the company, you own the company, it's now on your balance sheet. So it's an asset of yours, which means that you can put up the company as collateral for any loans that you take out even if it's a loan against the company.
Dyalekt:Man forget that somebody Googled it, no, I just need a loan. Trust me, it's gonna I just need a loan, right? Just give me a loan.
Pamela Capalad, CFP, AFC:So leveraged buyout was super crazy, because usually the ratio of debt is 10% equity. So 10% what the owner puts in and 90% of it can be leveraged 90% of it can be financed and put into debt. The craziest thing about this is this is so basically this debt is issued as bonds so
Dyalekt:90% can be leveraged 90% can be leveraged and it can I take a quick moment. This is how I was kind of facetiously saying like, Oh, well, why can't I just buy a company? This is one of those crazy tricks about being poor and about being rich and it's why it's a thick, broad Blind between the two and this
Pamela Capalad, CFP, AFC:is beyond being rich. This is like billionaire filthy rich kind of thing, right?
Dyalekt:Do you have to be at a certain level of money already? Yeah, once you are you can just play around.
Pamela Capalad, CFP, AFC:Yeah, you're like, oh other people's money all the time. Yeah, 90% of it. And here's the crazy part guys. So leveraged buyouts are basically what caused a lot of companies to go bankrupt in the 80s. They have a notorious History According to Investopedia. They are several prominent buyouts led to the eventual bankruptcy of a lot of acquired companies in the 1980s. So before you could actually leverage almost 100% of the debt so I guess this 9010 rule is the new you know, regulation to help to help prevent this crazy shit from happening except that's the regulation that's the regulation right so leveraged buyout. We are going to be talking about that a lot today. I already alluded to it a little bit with toys r us which is this is what happened in Toys R Us This is what happened to a lot of companies. Keep that in mind.
Dyalekt:I'm already done with the the leveraged buyout thing I'm like, I don't want to I don't I don't want to hear anymore.
Pamela Capalad, CFP, AFC:ended our childhoods. Everybody leveraged buyouts, not Amazon, or Walmart.
Dyalekt:Well, you know, you say that, jokingly, but I do remember Oh, I'm not joking. Like, there being prizes for stuff that were like a $5 gift certificate. True. Is
Pamela Capalad, CFP, AFC:that, right? No, it was a part of our childhoods, for sure. It totally was. I mean, it's it's the place like I, whenever I got to go, because it was one of those places where, you know, we didn't go very often. And when we did, it was always this like, really exciting treat, right? It was a special occasion. Yeah, it was a special occasion to go to a place that only sold toys. How crazy is that? Well, okay, so that's the investment appetizer.
Dyalekt:And the whole point of it is, you know, we know about this place. And it's weird to see these companies that we have a personal connection with go down. And yeah, this is just a microcosm of what's really going on with all of these true and with our changing economy.
Pamela Capalad, CFP, AFC:Can I back up just a second, to go back to the leveraged buyout thing. So one of the largest LBOs leveraged buyouts LBOs on record was the acquisition of the Hospital Corporation of America by Kohlberg Kravis and Roberts or KKR. And Bain and Company let's remember those names, shall we? Dialect KKR, keh, keh keh keh keh are KKR and Bain, man, and Bain and Company, which is a large private equity firm. Oh, yeah, completed one of the largest LBOs leveraged buyouts on record $33 billion to acquire the Hospital Corporation of America. So who really killed Toys R Us?
Dyalekt:I guess Mitt Romney. In case y'all didn't remember, one of the reasons that people decided they didn't like Mitt Romney was his ownership of a company called Bain and CO Yeah, there was a whole bunch of I remember the Daily Show putting the Bane mask on him. It was very funny. Oh, man. That's hilarious. Yeah, that's so hilarious for those of us workers
Pamela Capalad, CFP, AFC:know, because KKR and Bain and Company, also, were two of the three firms that purchase Toys R Us so they love doing these LBOs. So let's start with what happened. Six months ago, September 2017. Toys R Us been open for 69 years. They filed for Chapter 11 bankruptcy in September, the second largest US retail bankruptcy ever. It was one of 3535 Y'all 35 retail bankruptcies in 2017 35. I don't even want to go through the list, but there are a lot of them. So they announced last week, March 2018. If you're listening to this not right now that they will be closing all of their stores. So again, as recently as last year 20% of all US toy sales happened through frickin Toys R Us 20%. That's pretty decent market of all toy sales. That's like, all toy sales came out of Toys R Us and they're going bankrupt. They went bankrupt. They have to close all of their stores here and in the UK.
Dyalekt:Well, I saw when I was looking at the research, they were actually increasing the revenue. Yes,
Pamela Capalad, CFP, AFC:their revenue was increasing. Not my much it was about so and the revenue was going between it was like between 11 billion and 13 billion every year.
Dyalekt:I do have to say that's my problem. One of my big problems with the stock market in general and publicly traded companies is that the benchmarks for success for things that already exist and have been around for 30 or 40 years aren't continued success. The benchmarks for success are growth at an exponential rate. It's true.
Pamela Capalad, CFP, AFC:Well, this company isn't even publicly traded. Right? You Right, right, right. So the expectation still was to be able to cover all this debt that they had leveraged.
Dyalekt:Was this my problem with businesses
Pamela Capalad, CFP, AFC:was they get this big and when they get this convoluted, so here's the aftermath. It had 800 stores in the US 100 stores in the UK, they're all being closed or sold. They had 33,000 workers, they're all probably going to lose their jobs, that they're the ones who are losing out and
Dyalekt:and they're the ones who don't benefit. Because any of this Yeah, cuz the whole thing is that the leveraged buyout thing isn't necessarily supposed to lead to this. The idea is that, you know, you're restructuring and making the company work better. Actually, the idea of with leveraged buyouts is about oftentimes bringing a company from being a public company to a private company.
Pamela Capalad, CFP, AFC:Yeah, do so and doing that. And also, hopefully, like saving the mediocre returns or the decline in sales to like, kind of bring it back to like, Okay, so now you don't have the expectation of like quarterly earnings. Let's like go back to fundamentals. Yeah,
Dyalekt:leaner, meaner thing. But even in those situations, all the workers get are not fired.
Pamela Capalad, CFP, AFC:Yeah, exactly. It's like, okay, great. So all that company stock and whoop. And you
Dyalekt:know, the thing about it is workers are the people who bring the value, right?
Pamela Capalad, CFP, AFC:Yeah, absolutely. They're the ones like these stores wouldn't run without them, right. Ultimately, at the end of the day. So here is what happened. So Toys R Us, if we go all the way back Toys R Us was purchased by three private equity firms. They did this leveraged buyout, they bought back all of the stock from the shareholders. So stock buyback is another investment appetizer we got to do one of these days. But basically what this means is this private equity firm wanted to own Toys R Us and so what happens is, Toys R Us was public at the time in 2004. And when to the in 2005. When these private equity firms decided to buy it, they actually have to physically buy all the stock back from the shareholders and take it private again. So went from being public to being private. It was bought by KKR Kohlberg Kravis and Roberts, a real estate investment firm for NATO for NATO real teacher trust, and Bain Capital, Bain Capital, also Bain Capital, the PE firm behind the 2010 leveraged buyout of Gymboree, which filed for bankruptcy in June 2017. And, and y'all do you remember KB Toys? Yeah, guess who killed KB Toys in 2008? Yeah, fucking capital guys. This this company just hates kids. It
Dyalekt:was like their top competitor. Yeah, if it wasn't Toys R Us like, I remember and
Pamela Capalad, CFP, AFC:Toys R Us ended up owning all of the KB intellectual property after
Dyalekt:this. Oh, yes. I didn't know that. Yes, yes. I remember like back in the day. Toys R Us was in its own location. It was usually like far away. And you know, it was like a trick. That's why it was special. But when you were in the mall, which family or any shopping area, there was a KB toy. I went to KB Toys a lot. That was the place like yeah, your parents are out like doing something you would go in like window shop. Yeah, exactly. Toys. Yep. Yep. So that other huge toy company.
Pamela Capalad, CFP, AFC:Yeah, just the mall toy come just at Gymboree. Gymboree had 12, almost 1300 stores, went bankrupt in June 2017 KB Toys went bankrupt in 2008. All Bain Capital had a hand in all of this.
Dyalekt:That's fast. That's messed up. Because I think jamboree is past my time. I'm too old for Jamboree, and two breweries already gone.
Pamela Capalad, CFP, AFC:Oh my god, you're right. You're right. Oh, man. So 35 retail, there's a streak of this and 35 retailers went bankrupt in 2017 Compared to 18 retailers in 2016. And here's the crazy thing is a lot of these retailers are not going bankrupt because of the narrative that we're hearing. Right, the narrative that people are shopping online now people are turning to Amazon.
Dyalekt:Well, I mean, to be honest, that is hurting their sales
Pamela Capalad, CFP, AFC:that is hurting that have to deal with that is hurting and affecting their sales. And it's it's it's affecting the revenue for sure, but not to the degree that people need to be filing for bankruptcy. Yeah, that's the crazy thing. When we walk through how all of this happened. That is the crazy thing. Well, I
Dyalekt:just like to think of it as you know, people love to say that the invisible hand of the market is the thing that causes things to fail or succeed. And they have problems with things like bailouts and stuff like that because you're like just let them sink or swim right? But that's not exactly what's happening. This isn't that consumers decided they don't like toys r us
Pamela Capalad, CFP, AFC:right? This isn't that they all suddenly 20% of toy sales last year guys, Toys R Us people were shopping there still people still shop there. People are sad that this is happening. So yeah,
Dyalekt:you know, the last that's being created isn't just for the people who are working in the places for the consumers do in the marketplace in general, which is weird to say about a gigantic near monopoly like toys r us that we should be celebrating the downfall of but what's weird is that you know it's portended something even more scary Well that's
Pamela Capalad, CFP, AFC:the thing is there's so many of these companies falling so here is just the list of companies that were taken private and leveraged buyouts that are now going bankrupt Toys R Us, Payless, the limited Wet Seal Gymboree route 21. And true religion were all leveraged buyouts
Dyalekt:I never knew understood what wet seals sold anyway.
Pamela Capalad, CFP, AFC:Me neither, but they were one of those mall stores right? So a lot of these retail companies got involved in these leveraged buyouts and now they're all bankrupt because because the debt that they took on that private equity firms bought that private equity firms structured for them. They're the ones responsible for paying it back. And the people who are making the money off of it are these private equity firms, not just from owning these companies, but also from the advisory fees that they charge from all of that crazy stuff. So we're gonna go into those details in a second first dialect we'll have you go to a song Yeah, because yeah, well, this mourn the loss of toys or us well,
Dyalekt:the whole thing is is too much for me. Like I don't understand. People who want to get in the business of playing around with the technicalities of money is probably one of the reasons why I avoided it for a lot of times in my artistic career and talking about a why a lot of people don't like to talk about it because it doesn't need to be a thing. That is all you do in life. And that's all these Yeah, they're successful and they get a lot of money from it because that's the thing that they're going after but man, do something with your life. And people who are doing things with their life like these artists here coming out at Jackson Mississippi, we got kids super flat with the fifth child album and hit song Toys R Us kid check you in a minute brunch and budget
Unknown:you don't want to you will talk to us key you don't want to vote you will talk to us. You don't want to you will talk to you does she pregnant are you stressing because you get some with that question that your dreams on the break it's like she made what you think so she say Is she gonna keep cuz she see you got the killer instinct and your heart starts to st you were called every girl you used to lust machina you would have fought now you wonder why it was cool when it was her when you now you want to cut the pool when she talked about us start thinking about trust and if she ever had a gown decide and decide to ask for the slap no was over black and damn she started to cry and you do too because you know what nobody getting the word love you should do even if you want to go work you will toss it you don't want to take the rap all the sheep you don't want to be a man like the way that you live. You don't want to grow up you will tell us it was key you don't want to grow up you will tell us it was key you don't want to take the rap or the sheep you don't want to be a man like the way that you live you don't want to grow up you will tell us it was key you don't want to go you will tell us of us you don't want to you will tell us it was key at this very second your girl tell you that she pregnant are you stressing because you get some with that question that your dreams on the brain it's like she read what you think so she say Is she gonna keep because she see you got the killer instinct and your heart starts to sink you will call every girl you use the last machine or you would have thought that you wonder why it was cool when it was hard when you not you want to cut the pool was she talking about us started thinking about trust and if she ever had a gown decide and decide to ask her to slap no was over black and damn she started to cry and you do too because you know what nobody getting the world love you she'd do even if you slay tried wanted to be your wife never wanted to grow and be part of the light not the darkness but the light now you got to fit in like a whole wind and a right do a wrong way of shit you might because you don't want to grow well. You will tell us if you don't want to take your grandfather's sheep you don't want to be a man like the way that you live you don't want to grow up with this kid you don't want to grow you will tell us it was kid you don't want to go you will tell us it was kid was told never stick to pick up in a chick rah used to laugh at it now with her because it hit home everything in your saying not screaming dog get go but your girls I'm telling you baby stay strong so long you thought you could avoid above and from a boy to a man stay and never Neverland long as you can now you scream a damn good little job ain't shit could better treat your cheek please God bailed me out quick feel guilty because really you never prayed much now you lay just clutching your Bible liable to lose it mama confused but she don't ask you don't tell your girl call she just cried you just you know was just as much your fault but she can't tell and you can't bail your power wasn't there so you can't fail but you don't care because you don't know the nigga and you turned out you want to leave because where you will want to grow up. You will tell us it was kid you don't want to take the rap all the shit that you do. You don't want to be him man like the way that you play. You don't want to grow up you will toss her If you don't want to vote, you will tell us if you don't want to vote.
Dyalekt:We're back. Brunch and budget that was Toys R Us kid from kids super blog talking about you know, if people want to stay at Toys R Us kid but they got to grow up apparently because there's no toys r us to get around with.
Pamela Capalad, CFP, AFC:It's over guys Toys R Us instead, it's
Dyalekt:affecting you way more than I thought it would. It's not like you take frequent trips to the one do you do you do that? Did you used to do that when you were working in Midtown? Would you stop and take the ferry? Oh, no,
Pamela Capalad, CFP, AFC:I never even did the Ferris Wheel. They closed that one. That was one of the first ones to close when they went bankrupt. I remember when that ferris wheel went away.
Dyalekt:That would have been a nice lunch break. Right? Just sit there.
Pamela Capalad, CFP, AFC:The ferris wheel. Say how did they How did the giraffe
Dyalekt:or your shwarma Oh,
Pamela Capalad, CFP, AFC:you know what the Toys R Us commercials were just like, a such a huge part of like, Saturday morning cartoons. And after school cartoons. I never I really didn't even go that often. But it was still like, in my brain as part of childhood. You know,
Dyalekt:this is a great thing I did, how you're talking about how much it meant to you because it explains how much good marketing and becomes a thing. Because you know, it's like, oh, Toys R Us mess stuff. They didn't know how to handle the digital world and yada yada. But it seems like Toys R Us does a pretty good job of getting the hold. You would have probably gone to Toys R Us to buy stuff for your kids.
Pamela Capalad, CFP, AFC:Yeah. Oh, yeah, absolutely. That would have been the first place to think of yeah, you wouldn't
Dyalekt:need to see another commercial for 30 years, you would still just be like, Oh yeah, that's where I get stuff for my kids. Right? It's the toy store. They did a great job. They rent they ran other companies into the ground with I mean, probably devious not to do but with a great marketing scheme, which really gave people the flailing? Well, it was appealing, like you're saying it's like, yeah, I feel like this is a world that's created intended for me. They had a great market and it was torn down by people just playing around.
Pamela Capalad, CFP, AFC:That's exactly what it was there. They call these leveraged buyout companies or these private equity firms, Vulture capitalists as well. That's another term that you might see around, you may want to Google to see what other companies are doing this Bain Capital and KKR pretty notorious for it. So let's take you through the journey of Toys R Us his demise 2005, the company's stock was losing value due to mediocre sales. So this is why in 2005, the management, the company management decided, all right, we got to do something different. Sales are not doing great, which means our stock isn't doing great. So then they decided to sell the company in a leveraged buyout to Vornado Realty Trust, which is a real estate investment trust a real estate company because ultimately to Toys R Us owned a lot of real estate, right? They owned all of these buildings. And so you know, real estate investment trust was of course interested. And then the two private equity firms KKR and Bain Capital. So basically, they put up $6.6 billion. And the leveraged buyout meant that they only had to put in 20% out of their pocket. So it was it was actually a more responsible leveraged buyout than the usual 9010 ratio. 80% of it was borrowed, and Toys R Us and all of its assets, we were the collateral. So that meant that Toys R Us was responsible for paying off the debt. That was now a part of the company who
Dyalekt:agrees to that?
Pamela Capalad, CFP, AFC:I don't know. Yeah, I
Dyalekt:you know, that's the elephant in parts I don't get because it's like,
Pamela Capalad, CFP, AFC:it's management. And when they say management, they mean the CEOs who
Dyalekt:have relationships with each other and not loyalties of companies. Yes.
Pamela Capalad, CFP, AFC:And who also Yeah, and who will still in the bankruptcy proceedings. In December with the judge, they convince the judge that these executives were still eligible to receive up to $14 million of bonuses while they're filing for bankruptcy. So yeah, they were gonna be fine. Either way.
Dyalekt:Why be good at your job? No, no, no idea. Oh, it's no big. Is it really like is being good at your job just for broke, folks? I
Pamela Capalad, CFP, AFC:guess so. I don't know. This is crazy. Well, and the crazy thing is you have to have money, like a lot of money to be playing this game in the first place. Right? So the thing is, so Toys R Us Now is responsible for this massive debt. While right they sold the company because their stock was losing value, because they were having trouble increasing revenue. And now they have this huge debt to pay.
Dyalekt:And this is what keeps like, say a Bill Gates from just straight up buying Google with the same type of scheme because no one's gonna go along with it if things aren't already going wrong,
Pamela Capalad, CFP, AFC:right? Yeah, exactly. So this is usually this is usually where these companies kind of get preyed upon. And you know, the executive team is like, Okay, well, you know, I'm just
Dyalekt:wondering what the meeting is if they like come in with this really snazzy PowerPoint about how they're gonna restructure things and make it work and then it was all
Pamela Capalad, CFP, AFC:well, and I mean, it probably was gonna work out for everyone in the room, because it has so far 33 1000 people were in that room making that decision.
Dyalekt:Really. So that's the conversation is like, Yeah, well, hey, this is gonna work out for us either way.
Pamela Capalad, CFP, AFC:Yeah, exactly for the private equity firms and for the top people at, at Toys R Us, essentially. So on top of toys r us having to pay off this debt. Because Bain Capital and KKR private equity firms, they actually charge advisory fees and management fees to now manage the company. So they actually made $200 million,
Dyalekt:they bought the company, and then charge put debt on the company and then charge the company to hire them
Pamela Capalad, CFP, AFC:$200 million in advisory and management,
Dyalekt:buys them on how to go bankrupt $200
Pamela Capalad, CFP, AFC:million on top of owning this company. So essentially, they took all of the cash out of the company, because here's the crazy thing, and
Dyalekt:I do this on a smaller scale, can I just find the local bodega, then
Pamela Capalad, CFP, AFC:talk to him. They have such good bacon. And just don't take them away from me
Dyalekt:give away the bacon, I guess we would have stockpiled the bacon and stockpiled the bacon would be the collateral, then we would charge them to buy the bacon back from us. And then also their management fee. Oh no a service fee for delivering it to them. Yes, they have to tip us. So that's the route.
Pamela Capalad, CFP, AFC:Yes, exactly. That's exactly how it works. You're right. So Toys R Us before the buyout in 2004 had $2.2 billion dollars in cash. So they had liquidity essentially, they had reserves of $2.2 billion by the first quarter of 2017. They had $301 million in cash. And the debt had gone up from $2.3 billion that they owed to $5.2 billion dollars, which ended up being every single year, this meant Toys R Us had to pay $400 million in debt back every single year
Dyalekt:and longtime branch of budget listeners will know that that is not a great debt to savings ratio.
Pamela Capalad, CFP, AFC:It's really not no matter what scale you look at it at, right.
Dyalekt:And again, this is just because they came in and just dumped. Yep, some other debt, but not even some other debt. They dumped the debt of buying the company, the debt of them existing.
Pamela Capalad, CFP, AFC:Yeah, that's the craziest thing is this private equity firm was able to buy the company and use the company that they just buy as collateral to buy the company. That's a leveraged buyout. It's ridiculous. And now Toys R Us is responsible for making up for the $400 million of debt payments they have every single year.
Dyalekt:So some regional manager just got to learn, hey, so I'm your new boss, and you have to pay back me for not being your old boss. That's it, get to work.
Pamela Capalad, CFP, AFC:So basically, what these what this private equity firm was able to do is they basically took this company, they wrote it off as a loss because it wasn't making money. And then they were also able to charge these advisory management fees. The other thing is they tried to do something shady with toys r us in 2010. So once they pulled out all the cash from Toys R Us, right, because now they own this company and Toys R Us was paying back the debt that they had leveraged. So they tried to take the company public again, in 2008. They tried to get the public future like shareholders to buy back into Toys R Us to raise money again. I just I can't even my brain is like exploding. So the company went public, then it went back to private. And this private equity firm took all basically stripped the company of all of its assets. And then in 2010, five years later, they're like, Oh, well, the company has no more money. So let's raise money by putting it back on the market. Yeah, it's wild. It's wild. So Whoa. So basically what has been happening because Toys R Us had been paying $400 million a year to pay off these debts. The actual company operations itself went down the tank, right? They weren't able to pay their employees. They weren't able to work on the company's website. Because to that between 2005 and 2017. It was a critical time to build an online presence for especially for a toy company. Yeah,
Dyalekt:that's the next thing about it is even if they weren't innovating that well they didn't have the money to try things.
Pamela Capalad, CFP, AFC:Yeah, exactly. And they didn't even have the money to keep their stores up. That's the other thing that a lot of a lot of a lot of like CNBC and USA Today in a lot of these media, the media outlets are reporting is that Toys R Us has been getting bad feedback from consumers, that it's not that great to Shopping their stores anymore. Well, and
Dyalekt:that's the worst. Because if I go there and you don't have the stuff in stock, I'm going online and never coming back.
Pamela Capalad, CFP, AFC:Yeah, exactly. And Toys R Us is online presence was terrible because they didn't have the infrastructure or the money to put all of that in. So for basically, the last 12 years, Toys R Us was essentially dying. Like as soon as they sold their company to the to the private equity firm, their revenue could not keep up with the debt that they owed by taking on this leveraged buyout
Dyalekt:all to make a handful of rich guys richer. Yeah,
Pamela Capalad, CFP, AFC:yep. Exactly. Exactly. So this is really what led to Toys R Us ultimately filing for bankruptcy is they realized that they could not in 2018 cover this debt they were going to owe. And so they said, You know what, we have to file for bankruptcy. And then they go through bankruptcy proceedings and all of that. And as I mentioned, the bankruptcy judge overseeing the Toys R Us case ruled on December 5 2017. Right before the holiday season, or right in the middle of the holiday season, that the top 17 executives could still be entitled to the $14 million in incentive bonuses. Their reasoning was toys. Ross's reasoning was the bonuses were necessary to motivate the executives to boost sales during the critical holiday, you
Dyalekt:know, if anyone boosts sales, it's an executive.
Pamela Capalad, CFP, AFC:Yeah, exactly. Yeah. They're the ones totally responsible for it. So yeah, so people were getting paid. The people at the top are getting paid the people who probably agreed to do this, we're getting paid. One thing that these private equity firms also tend to do is they tend to buy out the existing CEO and, and, you know, send them on, give them a nice package to leave so they can put in their own people. So that's something that also happened in Toys R Us early on. Well, that makes sense to Yeah, absolutely. So here's the crazy thing. What does all of this mean, right? Because this isn't just Toys R Us. You heard the list of companies 35 companies went bankrupt, a huge amount of them, a huge percentage of them. Were part of leveraged buyouts, the retail industry in general, they're talking about retail apocalypse. These are all, you know, companies that we saw in the mall, in our childhoods in our teenage hood.
Dyalekt:Well, and again, these you know, retail jobs may be going away, and the gig economy may be kicking its butt and the fake gig economy may be kicking his butt and all that type of stuff. But these were things that were still existing until these predators came and whittled them
Pamela Capalad, CFP, AFC:away. Right? Well, and that's the craziest part about it is, you know, unemployment is at an all time low. People feel good about the economy, people are buying and consuming, again,
Dyalekt:livable wages aren't really there. So you know, right.
Pamela Capalad, CFP, AFC:Right. There's also that, but that's the thing and Toys R Us was still making money when it filed for bankruptcy. Making money and growing, making money. They were growing fast enough. Yeah, not well, not enough to keep up with the deal that they made, you know, 12 years ago. So what does this mean for us? Right? So what I mean, the we're
Dyalekt:losing a lot of jobs get lost, but yeah, like, what does it mean for the average guy?
Pamela Capalad, CFP, AFC:Yeah, yeah. And I mean, the week had a really great, a really great quote, and I know you found a really great new republic quote, as well, because they're the week are basically I just want to read this from the week, these sort of leveraged buyouts are dragging down retailers across the industry. In fact, we can widen our gaze further to the entire economy. In a remarkable turn, corporate payouts to shareholders and stock buybacks recently started collectively exceeding corporate profits. And this gap is made up by borrowing. So let's unpack that for a second. Right.
Dyalekt:Jeff Spross, by the way from?
Pamela Capalad, CFP, AFC:Yes, thank you. So basically, what this means is corporate. So let's break this down. corporate prayer to shareholders and stock buybacks recently started collectively exceeding corporate profits. So what that means is that there are more people doing stock buybacks, there are more people like doing these leveraged buyouts, there are more people paying out to shareholders, then how much money a company is actually profiting. So how is this happening, right? The money, they're basically buying something that doesn't exist. And so the way that they're able to do that is by debt is by borrowing money. So these corporate profits, though, just to give you an example, the corporate profits are let's say, a million dollars or a billion dollars or whatever it is, these corporate payouts and the stock buybacks are $2 billion or $1.5 billion. Where's that extra $500 million coming from an extra billion dollars coming from? It's being leveraged? There's debt being sold in that transaction when a company when a private equity firm decides hey, I want Wanna buy your entire company? I'm gonna buy it for more than what your profits were for last year. So now they're generating these dollars out of debt. And it's adding to this weird like equity debt balance sheet. And the company that they buy back is now owing them is now owing the debt for them on their behalf.
Dyalekt:Man, that sounds like not just a burden, but a headache.
Pamela Capalad, CFP, AFC:I know, right? I know, I got a little turned around. I'm like, holy crap. That's crazy.
Dyalekt:I'm like, I hope at least some accountants are getting paid to work that out. For real.
Pamela Capalad, CFP, AFC:I know, they're the ones that are you have making this happen, I guess. So basically, in short, how Bain KKR and Vornado treated Toys R Us is how Wall Street treats American businesses writ large. And if inequality is dragging down the profits of retailers and other industries and these cannibalistic practices, and the other half are the other half of the feedback loop driving inequality ever higher, and depriving Americans of the jobs and incomes they need to consume. I mean, we're cannibalizing the entire cycle of capitalism here. Well, I
Dyalekt:mean, that's what I've noticed with a lot of cats is they try to cannibalize capitalism, because it'll make them loot and not other folks, because they think capitalism is zero sum thing. And it's really just them chipping away at a circle and making a crap.
Pamela Capalad, CFP, AFC:Yeah, well, and one of the things that I know you always say on the show dialect is, you know, capitalism is a circle. And this the place that we're in now is Corporate Socialism. And these leveraged buyouts, I feel like are the biggest example of that. I'm saying, yeah, the I mean, the the idea that a huge private equity firm can just buy an entire company, and then use that company as collateral to get paid and management fees and advisory fees, and take on the company on their balance sheets,
Dyalekt:let me quote, David de in from the New Republic, because this basically sums up and really eloquently puts what we've basically been talking about this entire time, yes, this is a robbery in progress. Private equity firms borrow massively to buy companies and use corporate cash reserves to pay themselves back. Workers who supply the value to businesses see nothing. In fact, to service the debt companies usually cut staff. When the retailer collapses under the borrowing weight, all workers lose their jobs. And even when sales go up, like they have by 5% annually in the toy sector over the past five years. So Toys R Us dominant toy sellers, like Toys R Us cannot compete because of the debt burden. The company's profitability was increasing when it filed for bankruptcy.
Pamela Capalad, CFP, AFC:Sale. It was increasing.
Dyalekt:Yeah, I added the SAL party. That's probably thinking,
Pamela Capalad, CFP, AFC:he probably was. It's a robbery, it's straight up. People who have money, taking money out of these companies, and having them go bankrupt. And it's a pattern that we see over and over and over Toys R Us was the most recent victim 35 retailers went bankrupt in 2017.
Dyalekt:So can I ask, you've been doing a lot of informational with this. We have been before we go to our next song, I want to ask on an editorial tip Pam, as a financial planner, what does this mean for me as the person who doesn't work for any of these companies in particular?
Pamela Capalad, CFP, AFC:Right? No, I mean, that's a good question. I feel like that. I feel like that one of the reasons why we like to do shows like this and break down shows like this is because we are given a line of you know, analysis from the media about how we should think about this, right? We are told from other media, or other media Yeah, out as I guess we are, too. Yeah, no, but we're, we're given this narrative and the story that like, oh, online retailers with next thing, which is why all these other retailers are, but I think the thing that I get out of this stuff is nothing is as it seems, there are people who are still trying to pull the wool over our eyes and have been for a long time, who, who are trying to push the blame on someone else, when really, they're the ones that are making all of this money. And I think that as consumers, as as people who spend money at these places, even if you don't work at them, to understand the cycle that's going on, and to maybe shift your thinking in terms of like how the big picture is happening to to really understand who the people who are the corrupters are, I think is an important part of understanding your personal finances.
Dyalekt:Well, and it's like the idea of both capitalism and democracy. People say a lot of times in our society, what happens is you vote with your money. And the thing that takes away that concept, which you know, as flawed as you may seem it to be if you think that that's what it is, and that's what we have, it is a thing that can work. Yeah, but if you're working into that system, but people are gaming the system by limiting your choices, then you're not able to be democratic at all in You're capitalism, and that's the ill thing about it. People are talking about trying to make it so that rather than people getting food stamps, they get sent to a company from one company, they're gonna make a food and send to you that's removing people from their ability to make financial choices. So that's removing them from the democracy of capitalism. Yeah, absolutely. It's important for you to know where you are being removed and what choices you still have available to you. Yeah,
Pamela Capalad, CFP, AFC:and that's what we're gonna go into after the song.
Dyalekt:Yeah. And the next song is from some good old family, the homies some kid out in LA he's the lead emcee of the Milky Way and send lots of random great stuff that milk album shout out he's got a song called Rose R Us and we'll check your brunch and budget
Unknown:this very exciting thanks I'm glad y'all came. Came Yeah, welcome to the show desk break beat Jake see let's do it. Yeah, Mac telegraphic sellin Papa column make $1 make them holla keep them on asleep by the by my we explore protocol and agree so paranoid Yeah. In a normal Latin I wanted not to turn on each performance let me be the first to see your loops itself and see what see because we'd be a cruel joke. Like it was procedure we saw property we got Jesus walk in and some sneakers we threw talking that this new thing came from your speakers it's got me they want a bouncing ball spinning with a drop of the blacks in the wall you got from the Salvador but I've read that but and she could spit positivity you might go good let's think I don't get no perspective well you probably wouldn't go because now we got to fight the good we can move past the standard high status it's still assets perfect for practice in seconds blackness always adapted or was it always will because God made me it got me skills I said it it always will be way too real man it's man running his be back again would have been in the back again with a little twist put her north in the south for the week up all grounds for the East in the west you best believe we put it down with a little bit of this and a little bit of that you've got the nod your head who said we're gonna go book it's already in April you hate us I know karma she's a real you envy me and now your whole team Hello heavy acid fast forward pass the cold cast to check give us back from the show so close to been on a warm that's the old mask on yeah cold that's the truth to the bones to the nail never fails never called in from the seller to the roof on the side of the road with a pro for show when it's all done on the twinkling colored newspaper my car boots by giving you peace of your mind I can George's
Dyalekt:and we're back budget budget that was froze on us by the homie some and yeah, we're talking about the sum of all of our fears.
Pamela Capalad, CFP, AFC:Oh my god, it's true. So you're just talking about what really killed Toys R Us and it's leveraged buyouts as private equity firms. I want to go back to that new republic article because it ended in a way that feels really apocalyptic. And this is this is what's happening. Billions of dollars of this debt could come due in the next few years. Right? Because really, this is not just Toys R Us This is not just those handful of retail chain. There are a lot of companies that are not filing for bankruptcy right now that are involved in leveraged buyout. So if today is considered a retail apocalypse, they quoted Bloomberg, then what's coming next could be truly scary. 8 million American retail workers could see their careers evaporate, not due to technological disruption but a predatory financial scheme. The Masters of the Universe who devised it, meanwhile, will likely walk away enriched and policymakers must reckon with how they enabled The carnage.
Dyalekt:So the semi monopolies destroy the mom and pops, then the venture capitalists help the online retailers destroy the semi monopolies and then just eventually, it's just one guy,
Pamela Capalad, CFP, AFC:just one guy.
Dyalekt:Are there any mama pops left anymore? Like and have they been able to survive through all of this? Well, here's isn't that that's like a real test of like if the market is doing its thing if like smaller companies can't hang either.
Pamela Capalad, CFP, AFC:Well, here's what's really crazy is the mom and pop shops are actually doing fine. In the midst of big box stores. Closing CNBC actually had an article that they put out and trying to find the date 2017 2017. Oh, August 11 2017. Despite the Amazon effect, not all mom and pop stores are in trouble on Main Street. So the mom and pop shops are actually even in the midst of this retail apocalypse. Doing okay.
Dyalekt:Well, yeah, they're not they're coming back and taking over. But they're, they're existing. And they're well,
Pamela Capalad, CFP, AFC:and this is the crazy thing. And this is they they did some analysis on a little bit of why and there are certain things about mom and pop shops that, you know, big box retailers won't be able to really replicate. I mean, part of it is the, you know, this idea that consumers are more interested in artisanal and locally produced items, people perceive them as higher quality. I feel like that's the surfacey thing of like, Oh, I got this on my local blah, blah, blah, right? People are seeking more authentic experiences, unique store environments, people want the things that they buy to also come along with an experience. I mean, I think that not to cite another big box retailer. But I think that the Apple Store did a good job of that in the early days, not anymore.
Dyalekt:Well, it's funny, again, you were talking about how you know, the Toys R Us used to have a great experience. Yeah, part of their decline was when they took on all that debt and couldn't continue having a great experience,
Pamela Capalad, CFP, AFC:right? No, exactly. And I feel like that the stores that provide that great experience are the ones that really survive and thrive. And that's really one of the things that mom and pop shops have been able to provide. And people are willing to spend money on that because people do want stories to go along with the things they that they buy nowadays, the technology that's in place nowadays has actually made it easier for mom and pop shops to go beyond their local vicinity and their local area. So they can have exposure to other parts of the country in other parts of the world, without I've had having to physically have some kind of brick and mortar presence. And that's something with social media targeted marketing, mom and pop shops can really continue to stay in their niche, but be able to find people who aren't just within their local city block.
Dyalekt:And this is the type of competition that is fostered in capitalism. These small companies sell toys, and they're good at selling toys. And they can't compete with the big box companies, not because the box companies are necessarily better at selling toys, but because the box companies, I once heard people say that someone said that Toys R Us is not in the toy selling company that they are in the real estate business.
Pamela Capalad, CFP, AFC:Yep. And a lot of yeah, a lot of retail kind of
Dyalekt:nice, because the fact that they have all of this real estate means that they've got significant leverage over getting people in there. Yep. And when that is taken away, then it's left up to well, how savvy can you be?
Pamela Capalad, CFP, AFC:Right, right, who's left? What and that's the thing, too, is these retailers. It's not like people are going there, right? You were just talking about Toys R Us was still making a profit. When they filed for bankruptcy. They were still making money. So people still need the things that these big box retailers have. It's just now that they're shutting down. Where are they going to get them from? Right? They're getting them back. They're getting them from the local shops?
Dyalekt:Well, the funny thing is, is the it seemed like it was just balancing the market. It was taking the real estate part out of it and making it just about selling toys again. And in the toys market instead of I'm sure. Toys R Us has market share was way higher in 1989 than 20%. Instead of that it corrected down. So it having a share, right? It's got a big share, because it's a big place. But other places have a share there too, instead of someone coming in from the side and just completely removing them from the equation.
Pamela Capalad, CFP, AFC:Yeah, absolutely. So the other advantage of being a small business at the same time that you can be nimble and provide this artisanal, handmade stuff is the fact that you're still there, right. The fact that you understand your local community, the fact that you can build a loyal customer base, the fact that like you are part of the neighborhood, you are a small service business, you're a small retail business, and you can stabilize the neighborhood that you're in one of the Leonard Schlesinger Baker foundation professor at the Harvard Business School says, As neighborhood businesses, they play a significant role in neighborhood stabilization and providing convenience for people living close by. And the thing about that is you can't eat the thing that I feel Like ends up kind of leading to mom and pop shops demise when they try and expand is that they really understand their local market. And they've learned how to make a living in their local market and learn how to provide for the local market. I mean, even in Brooklyn, you can go three blocks away. And it's a totally different neighborhood, the neighborhood that you started out in, right. And so really what a lot of mom and pops are realizing is, I just want to stick to like where I am, I want to make enough to make a living they, one of the things that they one of the things that article also said is the vast majority of people are in the one to four employee range, are people have no deeper, profound aspirations for significant organizational growth, and just want to make sure they can provide a job for themselves and other family members and have a measure of stability. This is a slashing error. Again, I think that's another key part of this is, again, back to sort of the capitalism being a circle thing is, if I can provide enough for my family, and employ one or two or three or four people at the same time, then that's enough.
Dyalekt:Well, yo, it's not about Don't be ambitious. It's about know your ambitions. People say ambition, like it's this vague, infinite thing. And we've kind of been socialized into this idea that you always need to make more. And that you are only successful, like, I know, people who would listen to that thing you just said, and be like, screw that you're small minded. Yeah. Thinking like you're thinking like, you're gonna be local, I'm trying to be global. And everybody thinks that they have to be the number one thing with 100% market share to be successful.
Pamela Capalad, CFP, AFC:Right. And that's what success looks like. And I think that that's, you know, the story that we were told, and now that we're seeing all these retail giants collapse, because they did get, they hit a point of success, where they're like, Okay, now we're successful, but the success just kind of stayed flat. So now we're mediocre. So what are we going to do about that, oh, this private equity firm is telling us, Hey, you're mediocre right? Now, we can take you to that next level of success. And then 12 years later, you're filing for bankruptcy because you have $4 million in debt that you're trying to handle. Because the bigger that you grow, those numbers just get bigger and bigger, and you have less and less control of what's actually going on. And maybe you get the big buyout, right? Maybe you get that $14 million bonus still even in the midst of bankruptcy or your CEO does or whatever it is. But really, the thing that you thought you were contributing to the world, where is it now? Right? That that level of success just fell off a cliff, when you could have continued to provide a needed service or a needed retail product in your neighborhood, and maybe in the neighborhood next door, and had a great life? Right? And you're able to grow? And another quote that I really liked this lesson, your said is, I think they have aspirations of making a better living and performing better in their business. But that is different than thinking of a business growth strategy. And I think that we do, we are kind of all fed this line of like, oh, it's only successful if I continue to expand, it's only successful, they get bigger. And that's what we were taught because that's what you know, that's what shareholders expect when your company goes public. Right? Like you're alluding to dialyze Oh, yeah.
Dyalekt:As we're talking about our childhoods, you know, one of my favorite things from buying toys, Ross would be like, you know, they have like superheroes and Mickey vans. Yeah. And, you know, who had the plan of creating a small business that grew exponentially into infinity and never stopped growing, but didn't have a plan for what happened once they got there to every bad guy ever.
Pamela Capalad, CFP, AFC:That was always the
Dyalekt:right, like, the big joke for every villain of every children's series was, wait, so what are you going to do when you take over the world?
Pamela Capalad, CFP, AFC:Right? I don't know. That's as far as I got.
Dyalekt:Right. So remember, if that is your plan, where you're just going to try to make as much money as possible, you are on the Skeletor plan. Not gonna work out for you. Don't be Skeletor guys, I'm muscley guy in a loincloth is gonna knock you out.
Pamela Capalad, CFP, AFC:For real, and that's going to be on YouTube. So you know
Dyalekt:Worldstar.
Pamela Capalad, CFP, AFC:And here's what's exciting about the mom and pop stores, I think is more than 98% of retailers are actually small businesses where they employ a few fewer than 50 people. And so there is this vacuum of, of consumerism, essentially, that needs to be filled as these as these big box retailers closed down. And one thing that these big box retailers did is they did only give us limited options and limited choices for what we could buy and what we had access to. And now that these companies are being taken down, essentially by their own like, ideas of success, ultimately, right. That is an opportunity for people if you do have an idea if you do want to start a business now is actually a really great time to do it.
Dyalekt:And yeah, and one of the thinks about it in terms of choice and stuff like that. I feel like the big box stores, they created this weird world of choice where they gave you an environment of stuff that you could buy in and a selection of those things. And now people have decided if they niche down even more granularly, then they can give an authentic expert experience. Because when you walked into Toys R Us or a best buy one of those big box stores. The people there weren't expected to be experts in the things. Yeah, I can't go into Toys R Us and be like, Hey, tell me about the extra figures and the Xbox and the ponies. And so like, and they know all I don't have that expectation. But now I go into these smaller places that sell one type of thing. And I think that they know what they're talking about. Yeah,
Pamela Capalad, CFP, AFC:well, they picked out everything in the store. Yeah,
Dyalekt:the idea of curation is becoming more, I guess, more respected? Yeah, absolutely. Curating was what the big box stores did. It's just they did it in such a broad way was really difficult to understand it.
Pamela Capalad, CFP, AFC:Yeah, yeah. So I mean, it's a it's an interesting time to be consumer, I think it's kind of an exciting time to be a business owner, a small business owner in particular, because now we're kind of going back to feeling that there's a need that there's a need that we need to feel now as the small business owners, and we don't have to take over the world to do it. And so if you can figure out what your community needs online, locally, globally, whatever it is, whatever your community is, whatever you're an expert in, bring that to people and find that and other people. And this is how we can continue this circle of capitalism in the way that was intended to be
Dyalekt:and no one saying that you can't be a huge thing. Yeah, not at all, please, please feel free to be a huge thing. Know how big of a thing you think you will need to be? And yeah, maybe the number is going to be completely off. If you're like, oh, man, I need to make $2 billion. That doesn't mean you're not gonna make $10 billion, it doesn't mean you're cutting yourself off from that. It means you're setting a thing and you're making practical decisions on how you're gonna get there.
Pamela Capalad, CFP, AFC:Yeah, and and I think it's important to take these lessons that people have been making these decisions since the 80s, right with these leveraged buyouts, but to take these lessons and if you do find yourself in that position where you're at that level of success, to make a different decision to go a different way when you're here and to remember how this ends because we already know how it ends. So with that dialect speaking of the end
Dyalekt:from his album vulture we have mad beast out of a little town called New York City State of New York with his song at midnight things will change we'll check you next week much budget Thanks y'all peace
Unknown:just relaxing riding with the black been asking for since like clear results The Passion of the Christ feeders says for the facts and they can come while he's down until his ribcage is wrapped in both in his dome extremely like Sir and your nightmare comes in for you reach the 25th temper and of course the only reason it's a long ride is because you take the short one to cubicles in your office you can't do shit baby like it's effortless abortion is a caution use a roadmap take a detour to find out more about flow SEC This is why your swatches went out the window banks throw everybody on everybody got on everybody got on everybody gonna want everybody out the window fans going on everybody going on everybody going on everybody going on witnesses ran out the window fangs rolling on everybody got on everybody got on everybody gonna find everybody everybody you schooled but really how you live is run around in your dad's car. See it's yours. I know your kid is freestyle on the webcam about guns. Listen, I know that your mom's in the kitchen cooking. screaming Oh, McCain Come Look, your freak persona. It couldn't make me sick with the acts like Joaquin Phoenix, almost except us really made us realize the Twilight Zone. I don't believe it. I feel bad for you. Here's a city 16 here keeping your playing back status your garbage drops really seen as Mike Tyson total knockout champion defeat and deny witnesses right. Out the window bang pro win body Everybody got on everybody got on everybody going on everybody and then I went out the window fast on everybody got on everybody got up on everybody going on everybody and then I witnesses ran again like going out the window face rolling on everybody got on everybody got on everybody gonna provide everybody has a crowd response bodies cold as cold as a window with a camera as the new face new shades you name the restroom the bathroom right