The retailer, which operates its namesake chain as well as the Babies R Us juvenile products stores, said the move was necessary to restructure debt and establish a sustainable capital structure.
At the root of the problems facing Toys R Us is one that’s all too familiar to retailers today: liquidity. Or, more accurately, a lack thereof. A 2005 leveraged buyout for $6.6 billion by Vornado Realty Trust, KKR & Co. and Bain Capital resulted in more than $5 billion in debt.
The Wall Street Journal reports the Toys R Us situation came to a head once vendors started becoming strict with terms in an effort to protect their exposure going into Q4.
“Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet, which will provide us with greater financial flexibility to invest in our business, continue to improve the customer experience in our physical stores and online, and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide,” CEO and Chairman Dave Brandon said in a statement. “We are confident that these are the right steps to ensure that the iconic Toys“R”Us and Babies“R”Us brands live on for many generations.”
Prior to the filing, Toys R Us announced it had retained Kirkland & Ellis to aid in restructuring the business and Lazard to refinance its debt ahead of the $400 million in debt that will come due in 2018.
The company didn’t announce plans to close any of its 1,600 locations, and reiterated its commitment to performing through the upcoming holidays and beyond—even going so far as to announce seasonal job openings today. Toys R Us excluded its operations outside of Canada and the U.S. from the filing.
Toys R Us has secured more than $3 billion in debtor in possession financing, but Jaime Katz, senior equity analyst at Morningstar warns of “incremental uncertainty longer term, as the filing provides liquidity but doesn’t offer a long-term strategy for the Toys ‘R’ Us business, which we suspect will include debt restructuring as well as store closures.”
While the bankruptcy caused some initial jitters among investors of some of the top toy companies, stocks recovered pretty quickly. This is likely due to the retailer’s jolt of financing as well as its shrinking piece of the overall toy pie. Morningstar reports Toys R Us only represents about 10 percent of the business for both Mattel and Hasbro.
Toys R Us lags far behind its competitors in its two chief areas: toys and baby products. Business Insider estimates that in 2016, Toys R Us did $912 million in net sales in these categories, compared to Amazon’s $2.2 billion and Walmart’s $1.3 billion.
Further, analysts say these companies should have no problem redirecting goods through other channels—and the bankruptcy could prove to be a boon for the big toy companies given the strong name recognition many of their products carry. Jim Fosina, chief executive at Fosina Marketing Group, told MarketWatch, if they can strengthen their direct to consumer push, “they might have some of the strongest opportunities to excel.”
Their ability to make a go of it on their own underscores how the industry has changed.
Toys, like most other retail sectors, first felt a crunch from big-box chains. Then came the Internet. According to GlobalData Retail, five years ago only 6.5% of toy sales occurred online. By 2016, that number had risen to 13.7%.
UBS points to previous bankruptcies in this space as an accelerating factor. After the FAO Schwarz and KB Toys filings, there was a fast push online for the toy sector. A migration Toys R Us mismanaged.
In 2000, Toys R Us partnered with Amazon, basically ceding its online presence to the etailer rather than developing its own site. That relationship eventually soured, and it wasn’t until earlier this year that the toy retailer finally seemed to get a handle on its online business. In the meantime, Amazon’s dominance grew, the big-box stores became aggressive in the e-commerce space and kids have become more enthralled with screens than dolls.
“The fact that Toys ‘R’ Us ceded control of its own online offering to Amazon during a period where e-commerce began to really take off meant that the retailer was always playing catch up with its online competitors,” said Jon Copestake, chief retail and consumer goods analyst at the Economist Intelligence Unit, told MarketWatch.