Christina Estes/KJZZ

Sign on the door of the former Toys R Us store at Chandler Pavilions.

When Toys R Us closed all 735 stores in the United States last month, many people blamed online competitors like Amazon. But former employees are pointing fingers at private equity firms and demanding severance pay, including a former Phoenix store manager.

Sadness And Anger

Inside her Chandler home, Tracy Auerbach’s dining room table is covered in memories.

“There’s all kinds of fun things that we did in the store,” she said, pointing to huge black frames filled with dozens of photos.

“There I am as a giraffe,” she said with a smile.

The pictures used to hang in her office at the Babies R Us store in Ahwatukee. That’s also where she displayed a shiny, silver trophy.

“Out of 15 stores in Arizona, my Babies R Us store was the winner of this trophy,” she said. “So, I keep it near and dear to my heart.”

After 30 years with Toys R Us, including 10 in Phoenix, Auerbach’s final day was gut wrenching.

Christina Estes/KJZZ

Chandler resident Tracy Auerbach shows off some awards and photos from her 30-year career with Toys R Us.

“Being in retail you work lot and lots of hours so the people you work with really and truly become your family,” she said. “Now you don’t get to see your family every single day. We’re still in touch, but it’s different.”

As tears fill her eyes, it’s easy to feel sorry for her. But Auerbach doesn’t want pity, she wants money — severance pay that Toys R Us has historically provided employees and promised them.

When workers began worrying they might get nothing, Auerbach says she told them to give it time, the company would come through.

“And then they made a fool out of me,” she said.

Auerbach got mad and got moving. With the help of two groups, Rise Up Retail and Center for Popular Democracy, she joined other former employees to lobby politicians in Washington, D.C., and to march into the lobbies of companies they hold responsible.

“Never done anything like this in my life,” she said.

What Went Wrong?

How did Auerbach and 33,000 other employees end up in this fight? It goes back to 2005 when private equity firms Bain Capital and KKR and real estate investment fund Vornado Realty Trust used a leveraged buyout to purchase Toys R Us. A leveraged buyout includes a combination of equity and debt. The $6.6 billion dollar sale included more than $5 billion in debt.

“The idea is that you pay down that debt over time, and thereby increasing the equity share, just like building home equity,” said Laura Lindsey, a finance professor at the WP Carey School of Business at Arizona State University. “The question is whether you think sales are going to generate enough to service the debt, pay the interest on the debt.”

Toys R Us was on the hook for hundreds of millions in annual interest payments. Now, toss in the Great Recession, a failed partnership with Amazon and competition from Walmart and Target.

During this time, Tracy Auerbach says employee benefits, positions and hours were cut.

“You know if you’re only working only 12 hours a week you don’t usually have that buy in to the company and that kind of hurt us in the long run,” she said. “There was less time to clean, to fix, to take care of things that maybe were falling apart or needed attention. There was no one there to do it.”

How Private Equity Firms Make Money

Since the buyout, Bain, KKR and Vornado have collected nearly $500 million in fees and interest payments. Arizona Congressman Raul Grijalva and his colleagues in the Progressive Caucus sent a letter to the firms asking, among other things, exactly how they earned those fees.

“There has to be some control point and there has to be some public disclosure,” Grijalva said. “These leveraged buyouts have to come with some rules. It can’t just be a corporate raider goes in, like Bain, buys it, takes what it can from it, dumps debt on it and then leaves.”

But ASU’s Lindsey says private equity firms want to turn companies around because then they make more money. Many investors in private equity funds are public pensions — groups that cover retirements for teachers, police officers and firefighters.

“Let’s be frank — these people are highly compensated, but they’re also highly skilled and they return money to their investors,” she said. “Do we think there’s some sort of market friction or failure that enables them to charge higher fees than their investors are willing to pay? I would have to say no because these investors are large pools of capital that are also managed by some very sophisticated people.”

During last month’s investment committee meeting of the California Public Employees’ Retirement System, former Toys R Us employees spoke out.

Christina Estes/KJZZ

Before gift cards became popular, Toys R Us offered "Geoffrey money" which came in denominations of one, five, ten and twenty and could be used like real currency at its stores.

“I’m asking you to do your homework and make sure you’re not investing in companies that are all about corporate greed instead of workers’ needs,” said a woman who identified herself as Sandra.

In Minnesota, the state pension board has suspended new commitments to KKR while it reviews the firm’s role in Toys R Us’s downfall. People close to the situation but not authorized to speak on the record say severance pay discussions are underway between Toys R Us and former employees.

“After 30 years of working with them, I got plenty of time to wait,” said Auerbach.

She plucks a piece of paper off her dining room table and says it’s “Geoffrey money,” named after the iconic Toys R Us giraffe. Larger than a real dollar bill, it has a pale blue background with an image of Geoffrey in the middle. During the 1980s and '90s, Geoffrey money came in singles, fives, 10s and 20s and were used just like real currency at the stores.

“It got so crazy that people would counterfeit it," said Auerbach. "It even has holograms and stuff on it and specific serial numbers."

Today, Geoffrey money can’t pay for anything, but it’s still worth a lot to Auerbach, just like her employees.

“You want to make sure you help them, that’s my job,” she said between sniffles. “And even though it’s not my job anymore, it is. I don’t know how I can explain that. They really are my family and I need to take care of them.”

KJZZ reached out to KKR, Bain Capital, Vornado and Toys R Us for comment. Only KKR responded with the following statement from spokewoman Kristi Huller:

“I can confirm that KKR has been looking for a way to support Toys R Us employees, separate and apart from severance. It’s a possible financial commitment that recognizes an unprecedented situation in our experience and seeks to help those in need. We have been working with various stakeholders and experts to design a plan that could actually benefit former Toys employees.”