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Toys ‘R’ Us Collapses Into Bankruptcy Thanks to Crushing Debt

Updated on
  • Plans to build inventory and calm vendors in time for holidays
  • Retailer cites “race to the bottom” against Amazon, Walmart

Toys “R” Us Inc., the ultimate toyland for a generation of postwar baby boomers, filed for bankruptcy thanks to a crushing debt load from a buyout and relentless competition from warehouse and online retailers.

The retailer, which has 1,600 stores in 38 countries, said its hand was forced after an attempt to restructure out of court sparked a press report about a potential bankruptcy, spooking critical vendors and credit insurers. But it intends to make the best of the situation and revive its business in time for the holiday shopping season.

“Chapter 11 was certainly not the company’s preferred outcome,” Chief Executive David Brandon said in a court filing. “The timing of all of this could not have been worse.” He cited the immediate need to build inventory for the holiday season, which accounts for 40 percent of annual revenue. Thanks to a new $3.1 billion operating loan, the company plans to stabilize operations and reopen supply channels while in bankruptcy, he said.

The filing is the latest blow to a brick-and-mortar retail industry, which has seen a string of bankruptcies from Payless Inc. and Gymboree Corp. to Perfumania Holdings Inc. Chains are reeling from store closures, sluggish mall traffic and the gravitational pull of Amazon.com Inc.’s lower costs and global home delivery. More than 10 percent of U.S. retail space, or nearly 1 billion square feet, may need to close, convert to other uses or renegotiate rent, according to data from CoStar Group.

‘Unrelenting Race’

To compete with Amazon, Target and Wal-Mart, “Toys “R” Us would have needed to slash prices to maintain traffic into its stores, “decreasing its revenue and cash flows in an unrelenting race to the bottom,” Brandon said in the filing.

The reorganization will focus on investment in marketing, technology, and an in-store experience that will help it compete in the new environment, Brandon said. The bankruptcy filing in Richmond, Virginia, estimated the company has more than $5 billion in debt, which it pays around $400 million a year to service. 

Much of that is the legacy of a $7.5 billion leveraged buyout in 2005 in which Bain Capital, KKR & Co. and Vornado Realty Trust loaded the company with debt to take it private. Since then, the Wayne, New Jersey-based chain has struggled to dig itself out.

The $3 billion loan, from a JPMorgan Chase & Co.-led syndicate that includes some existing lenders, will fund operations while it restructures the liabilities, according to a company statement. The funding is subject to court approval.

Staying Open

The company doesn’t plan to close stores and says its locations across the globe will continue normal operations. It’s 1,600 stores, which include Babies “R” Us, are complemented by sales through websites including Toysrus.com and Babiesrus.com.

Operations outside of the U.S. and Canada, including about 255 licensed stores, are not part of the Chapter 11 filing. A Canadian unit intends to seek protection in parallel proceedings. In Australia, Toys “R” Us plans to add another five stores to its existing 39 by Christmas, said Jessica Donovan, a local marketing manager.

“Like any retailer, decisions about any future store closings – and openings – will continue to be made based on what makes the best sense for the business,” Michael Freitag, a spokesman for Toys “R” Us, said in an email.

Mattel Inc., a key supplier, said it stands by the company. “As one of our most important retail partners, we are committed to supporting Toys ‘R’ Us and its management team as they work through this process, particularly as we approach the holiday season," the toymaker said in an emailed statement.

Dangerous Dominos

While Brandon made some progress in reducing the closely held chain’s liabilities, he ultimately was unable to resuscitate its fortunes. He took over Toys “R” Us in 2015 and sought to make shopping there a more enjoyable experience with product demonstrations and the “Hot Toy Finder” to help customers locate items. Last year, he set out a vision of kids “dragging their parents to our stores because they want to see what’s going on.” 

Beginning in late August, the company tried to tackle its debt load through talks with term loan lenders. A Sept. 6 report that a bankruptcy was being considered “started a dangerous game of dominoes” in which the company lost the confidence of nearly 40 percent of its international and domestic vendors, who refused to ship products without cash in advance, cash on delivery, or payment of all outstanding obligations, according to Brandon’s court filing. This meant Toys ’R’ Us needed another $1 billion in liquidity.

The company’s roots date to 1948, when Charles Lazarus opened Children’s Bargain Town, a baby-furniture store, according to the Toys “R” Us website. He added toys two years later and opened the first Toys “R” Us in 1957.

The case is In re TRU-SVC, 17-34659, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

— With assistance by Rachel Chang, Angus Whitley, and Richard Weiss

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