Toys ‘R' Us, the big box toy retailer struggling with $5 billion in debt and intense online competition, has filed for bankruptcy protection ahead of the key holiday shopping season — and says its stores will remain open for business as usual.
The company said the proceedings are a way for Toys ‘R' Us to work with its creditors on restructuring the debt beleaguering it. And it emphasized that its stores worldwide will remain open and it will work with suppliers and sell merchandise.
Filing for bankruptcy protection “will provide us with greater financial flexibility to invest in our business … and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide,” Chairman and CEO Dave Brandon said in the announcement.
The move comes at a critical time leading into the holiday season that is crucial to retailers’ bottom lines. The company said it was “well stocked as we prepare for the holiday season and are excited about all of our upcoming in-store events.”
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Retailers of all kinds are struggling. The Toys ‘R' Us bankruptcy filing joins a list of at least 18 others since the beginning of the year – including Fort Worth-based RadioShack, shoe chain Payless Shoe Source and children’s clothing chain Gymboree — as people shop less in stores and more online.
“Toys R Us had little choice but to restructure and try to put itself on a firmer footing,” said Neil Saunders, managing director of GlobalData Retail. However, he added, “even if the debt issues are solved, Toys R Us still faces massive structural challenges against which it must battle.”
Toys ‘R' Us, a major force in toy retailing in the 1980s and early 1990s, started losing shoppers to discounters like Walmart and Target and then to Amazon. GlobalData Retail estimates that in 2016 about 13.7 percent of toy sales were made online, up from 6.5 percent five years ago.
And children are increasingly moving more toward mobile devices as playthings. “For many children, electronics have become a replacement or a substitute for traditional toys,” Saunders said.
Much of the toy supplier’s debt is the legacy of a $7.5 billion leveraged buyout more than a decade ago. In 2005, Bain Capital, KKR and Vornado Realty Trust loaded Toys ‘R’ Us up with debt to take it private. Since then, the New Jersey-based chain has struggled to dig itself out.
In some years, the company had to spend as much as half a billion dollars on cash interest expenses alone, according to Bloomberg Intelligence analyst Noel Hebert. That left Toys ‘R’ Us with less cash to put toward store expansions, merchandising, and growing its online presence.
“You have to invest online — because your principal competitors there are really good — and you’ve got to deal with the debt load and your maturities on top of that,” said Charles O’Shea, who covers Toys ‘R’ Us for Moody’s. “The pie is only so big.”
In 2015, Toys ‘R’ Us named Dave Brandon as its chief executive officer, turning to the former head of Domino’s Pizza to attempt a comeback. Brandon had run Domino’s for 11 years and gained a reputation as a turnaround artist. He helped shepherd the pizza chain, then owned by Bain Capital Partners, through the largest initial public offering in restaurant history in 2004.
Brandon showed signs of progress in early 2016, when the company posted its first holiday sales gain in four years. But the comeback faltered in the more recent Christmas season. Same-store sales dropped 2.5 percent during the final nine weeks of last year, hurt by sluggish demand and deep discounts. The toy seller had to reckon with new competitors driving prices lower and lower, O’Shea said.
If Toys ”R“ Us can get its debt under control again, the chain still has promise, TTPM’s Silver said. Its earnings before interest, taxes, depreciation and amortization has been good, he said.
“If they didn’t have the debt, they would be making $500 to $600 million a year in profit,“ he said. “The problem is the debt.”
This article includes material from The Associated Press and Bloomberg News.