Last Updated on January 3, 2020 by Danielle
After declaring bankruptcy last September coupled with the recent announcement of store closures and layoffs, and a bleak outlook for potential buyers or debt renegotiations, Toys R Us may have no choice but to liquidate its entire business by next week.
According to reports, the bankrupt New Jersey-based beleaguered U.S. specialty toy retailer, Toys R Us, is considering the possibility of liquidating its entire U.S. chain of retail stores. The final decision could come by as early as next week. This news comes after it filed for bankruptcy late last year and its announcement of 182 store closures, plus an additional 200 more store closures and layoffs earlier this year.
Toys R Us’s only chance of survival may be to either find a buyer or restructure its debt with lenders. If this doesn’t happen, a complete liquidation of Toys R Us’s retail stores is looking more likely, according to sources. The biggest problem is Toys R Us is working with an outdated business model and has roughly $5 billion of debt. Closing stores is a short-term bandage to a much larger problem. It needs a leaner, revamped business model in order to have any chance of remaining solvent.
Toys R Us took out a $3.1 billion loan in an effort to keep stores operating during its turnaround efforts. However, sales dipped more than expected during the crucial Christmas holiday season, casting serious doubt on its long-term viability.
Toys R Us’s United Kingdom business was recently placed in the hands of administrators after it failed to sell its business, essentially paving the way to shut its doors completely. This business unit was not originally part of the U.S. filing for bankruptcy.
This news caused shares for the largest toymakers to go tumbling like Jenga blocks. Mattel’s shares dropped 7 percent, while Hasbro’s dropped 3.5 percent. Spin Master and Jakks Pacific followed suit with 3 percent and 5 percent declines, respectively. Earlier this week, LEGO also reported its first sales decline in 13 years. Toys R Us accounts for roughly 10 percent of sales for both Hasbro and Mattel.
The demise of Toys R Us is reportedly the result of Bain Capital, KKR & Co. and Vornado Reality Trust piling on debt after a $7.5 billion buyout. For many years, Toys R Us was able to successfully refinance its debt and avert bankruptcy. When online competitors emerged, it took its toll on the company. Instead of spending money on its massive interest payments, Toys R Us could have better spent its money on technology and bolstering its operations.
Toys R Us was forced to hire debt restructuring advisers last year. When Toys R Us filed for bankruptcy, roughly forty percent of its vendors cut off shipments. Toys R Us was forced into seeking court protection. As a result, Toys R Us went into bankruptcy without a solid plan to restructure its debt. Ultimately, this made the possibility of exiting bankruptcy even more challenging.
Since Toys R Us comprises roughly 15 percent of toy revenue in the U.S., Toys R Us’s potential liquidation would deal a heavy blow to the toy industry, which grew only 1 percent last year, according to NPD. The short-term result of clearance sales would impact the industry by eliminating market share and slowing down competitors’ sales. Toys R Us was more willing to take chances on new products and smaller toy companies than Walmart or Target, which typically take a more cautious approach.
According to Gerrick Johnson, an analyst for BMO Capital Markets, if Toys R Us disappears, it would hurt innovation. “Without a dedicated toy retailer – 365 days a year – you will see growth in the industry slow. Toys R Us is where new products can be discovered and blossom. It’s also where smaller toy companies can have an opportunity. It’s going to be harder for new items to break out.” Johnson stated. Interestingly, MGA Entertainment’s L.O.L. Surprise! collectible dolls, the hottest toys right now, started out at Toys R Us. Imagining a world without Toys R Us – it would mean anything but the most popular products would suffer.
It is not uncommon for bankrupt retailers to eventually liquidate, but Toys R Us was optimistic about its turnaround and its earnings showed some signs of improvement. In 2016, Toys R Us delivered $11.5 billion in revenue. Even so, due to large interest payments, the company didn’t report a profit dating back to 2013.
Founded in 1948 when Charles Lazarus opened Children’s Bargain Town, Toys R Us began as a baby furniture store and quickly grew into the largest U.S. toy chain. In the 1990s, sales were increasing at a rate of 10 percent annually.
More recently, weaker traffic and the shift of consumers online took its toll. Interestingly, Walmart – not Toys R Us – holds the crown of toy sales champion in the U.S. In 2001, video games accounted for 19 percent of Toys R Us’s business, while they only comprised 4 percent of its sales in the latest fiscal year. Additionally, its sales declined by 5 percent in the year leading up to its filing for bankruptcy in September.
Despite its struggles, there is still strong demand for toys – with Toys R Us generating in excess of $7 billion annually. Similarly, Amazon has been delivering record-breaking toy sales. In contrast to Amazon.com, Toys R Us’s physical stores and online site encourage discovery of new items.