To recall a lunch from 37 years ago, it has to have had an emotional impact.  This one certainly did.  I remember feeling somewhat despondent as the lunch began.  The guest speaker was the Chief Financial Officer of Toys R Us.  At that time, the toy retailing industry was an eight billion dollar business.  Toys R Us with $250 million in sales was the largest company.  I had bought the stock at ten dollars and as I sat at the lunch … it was at five dollars.  That reality would have made anyone despondent.

Charlie Lazarus, the founder, sat mutely while his CFO, Norman Rifkin, droned on and on.  Instead of being reassured, I felt I had made a mistake.  Suddenly a question was asked which caused Lazarus to jump out of his chair.  “That reminds me of the first Barbie doll I bought!” he gushed.   In 1978 I had been in the investment business for 13 years.  Yet this was the first C.E.O. I had ever seen demonstrate passion.  Rifkin sat down.  Lazarus went on for over an hour in a Pentecostal rapture about his business.

Toys R Us was a category “killer.” His concept was to “own” the retail toy category by selling merchandise at prices which the competition could not match.  The company operated in a large industry where it was the dominant company.  Most competitors sold toys only three months before Christmas and paid suppliers as they ordered.  Toys operated all year and didn’t pay suppliers until after the close of its year, January 31.  Dominance gave him leverage with suppliers.  In this case, it gave the company free use of the money owed suppliers for months. The business plan was everyday low pricing.  The company never ran a sale; it never had to.  Its dominance and vendor payment plan undercut competition.  Lazarus also hit competition with new technology.  He would sit in his Paramus N.J. office each day and see what sold … and what didn’t.  He would then order more of what was selling.

Lazarus had started the business selling children’s furniture in his father’s bicycle store.  One day a customer had asked him, “What about toys?” That question led to Toys R Us.  The concept caught the attention of Interstate Department stores which purchased it for two million in cash.  Later Interstate --- a failing business--- filed for bankruptcy.  The judge at the hearing dissolved Interstate and created a new company from the much smaller Toys R us subsidiary.  He said it was the best deal for creditors because he considered Charles Lazarus a “retailing genius.” The judge gave all creditors stock in the new company as payment.  That decision was the reason my $10 stock dropped to $5!  People who were owed money by Interstate Department Stores simply sold the Toys R Us stock they received.

Earnings were released a few weeks after the lunch.  I knew that Charlie Lazarus had been awarded stock based on the company’s profitability.  I also knew that he had aggressively expanded the store base.  So my expectation was that the cost of the new store build-out would be capitalized on the balance sheet as an asset.  But no, he expensed it through the income statement as a cost.  So earnings were “light.” That cost him stock. But it was the right thing to do.  The stock went higher for years!

-Francis Patrick Boland