To recall a lunch from 38 years ago, it had to have an emotional impact.  This one certainly did.  I felt despondent as the lunch began. The guest speaker was the Chief Financial Officer, Norman Rifkin, of Toys R Us.  At that time, the toy retailing industry was an eight billion dollar business.  Toys R Us was the largest company in the industry at just $250 million.  I had bought the stock for ten dollars and as I sat at the lunch it had fallen to five dollars.  Such a reality would have made anyone despondent!

Charlie Lazarus, the founder of “Toys,” sat mutely while his CFO, Norman Rifkin, droned on and on.  Instead of feeling reassured, I felt I had made a mistake.  Suddenly a question was asked that 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 in a Pentecostal rapture about his business.

Toys R Us was the first retailer to become a specialty retailer.  The concept was to “own” a retail category by selling merchandise at prices others could not.  It was a unique idea in 1948 when Lazarus started his business.  Most competitors sold toys just before Christmas.  “Toys” operated year round.  Suppliers were paid at the close of the company’s business year, January 31.  Such was the power of industry dominance.  This arrangement gave Toys R Us free use of the money throughout the year.  Toy manufacturers were willing to wait because they could plan their factory schedule well ahead.

The business model was based on everyday low pricing.  The company never ran a sale; it never had to.  The company’s dominance and vendor payment plan undercut all competition.   Furthermore, Charlie Lazarus was an early user of technology.  At the end of each day he would sit in Paramus N.J. and review reports from his stores telling him what sold that day … and what didn’t.  He would then order more of what was selling.  At that time, only he and Sam Walton of Wal-Mart were doing that.

The background:  Lazarus had started the business selling children’s furniture at his father’s bicycle shop in Washington D.C.  One day a customer asked, “What about toys?” That question led to the first three stores.  Then in 1966 Interstate Department Stores offered him two million dollars in cash for the business.  By 1974 Interstate had gone bankrupt.  As it emerged from bankruptcy in 1978, the judge created a new company from the much smaller Toys R Us subsidiary.  He said he was it was the best deal for creditors because he considered Charlie Lazarus to be “a retailing genius.” All creditors were given stock in the new company for the money Interstate owed them.  That was the reason the stock I had bought for ten dollars had fallen to five!  Creditors sold the stock.  To them it was “found” money.

 The “Toys” experience taught me it was best to own an entrepreneurial company.  Ideally, it should also be a small but dominant company in a highly fragmented business.  Toys R Us stock subsequently went higher for years much as Microsoft, Wal-Mart and Nike did.  They all had similar characteristics.  

-Francis Patrick Boland