Toys "R" Us - Is Dying

The next time you go to the famous but pricey toy store – Toys “R” Us – don’t be surprise if you couldn’t find one. Even if you manage to find the store, chances are there could be lesser toys than usual, or worse still, rows of empty shelves. You could either rush for whatever toys leftover which you couldn’t normally find in your country, or wait for the closing down sales day to get higher discount.

In fact, some Toys “R” Us stores in New York have shown hints of “bankruptcy”as suppliers have scaled back shipments to the retailer. As Toys “R” Us desperately continues talking with lenders to refinance debt – and avoid a potential bankruptcy filing – the vendors are not taking any chances. The toy merchant needs as much as US$400 million to meet its debt which will be due next year.

As words of Toys “R” Us seeking court protection spread, the cost of insuring shipments of toys to the toy store becomes too expensive for suppliers to deliver their parts. Therefore, vendors prefer to sit on their hands than suffer losses later. The bankruptcy filing could come as early as next week – before the important holiday sales season.

The Wall Street Journal earlier reported that the company was considering filing for Chapter 11 protection in U.S. Bankruptcy Court in Richmond, Virginia. The potential Chapter 11 filing could be a result of the company’s suppliers tightening trade terms, including holding back on shipments unless the toy retailer is able to make cash payments on delivery.

Although retail bankruptcies aren’t rare this year, none of the retailers were as big as Toys ‘R’ Us, which has about US$5 billion (£3.68 billion; RM20.96 billion) in debt and more than 1,600 stores worldwide. Toys “R” Us had previously said it was working with investment bank Lazard Ltd to help address its huge debt, of which US$400 million will mature 2018.

Since Toys “R” Us was taken private for US$6.6 billion in 2005 by KKR & Co L.P. and Bain Capital LP, together with real estate investment trust Vornado Realty Trust, the toy retailer has been loaded with more debt. The major problem of brick-and-mortar shops like Toys “R” Us is the competition against online shops such as Amazon.com and discount shops like Wal-Mart Stores Inc.

So far, suppliers were spooked by news that there’s more than 60% chances that Toys “R” Us won’t meet its obligations of debt payment in the next year. Toys “R” Us needs to find a financial solution quickly – that’s US$400 million – so that shipments could resume simply because 40% of its sales during the fourth-quarter holiday season.

When the news leaked that Toys “R” Us has hired bankruptcy lawyers Kirkland & Ellis to help restructure its heavy debt load, its bond crashes from nearly par at the start of the month to 43 cents on the dollar as of Friday. If indeed the American iconic toy retailer fails to secure the US$400 million financing, it would join a list of more than 300 retailers that have filed for bankruptcy since the beginning of 2017.

Although Chapter 11 doesn’t mean Toys “R” Us will eventually go out of business, most often than not it would end up closing tons of storesworldwide. For example, J.C. Penney closed 138 stores, Macy’s – 68 stores, Gymboree – 350 stores, Payless ShoeSource – 512 stores, Bebe Stores – 180 stores, Rue21 – 400 stores and RadioShack – 1,000 stores.

The burning question is: even if Toys “R” Us is lucky enough to find someone who is willing to burn US$400 million to keep it afloat throughout 2018 without going through bankruptcy, what about the rest of the debt? There’s a very high chance that the company would go for the Chapter 11 regardless, because that’s the only solution to have the luxury of time to restructure the toy retailer.

There’s no point rushing to meet debt obligation for financial year 2018 only to continue being slaughtered by Amazon.com and Wal-Mart Stores. While the Seattle-based online retailer Amazon saw its toy segment sales jump an impressive 24% versus just 5% for the overall market, once-market-leader Toys “R” Us has posted a disappointing 5 years of decline.

At the same time, cash-rich rivals such as Wal-Mart Stores Inc. and Target Corp. have funnelled capital into taking over their competitors, investing billions of dollars in efforts to lower prices and improve their online sales amid the Amazon-led e-commerce revolution. With so much debt on its hands, how could Toys “R” Us compete with them while solving its mountains of debt at the same time?

It appears that Toys “R” Us is slipping down the same slope as Macy’s Inc., which last year promised to improve its performance and use cash to pay down its debt – a whopping of US$5.5 billion in net debt at the end of Q1. Macy’s was forced to use two thirds of its free cash flow to pay off $750 million in maturing debt, while buying back more to stay relevant in a disrupted retail space.

And like Macy’s, Toys “R” Us might have no choice but to close a significant non-profitable stores nationwide, and even worldwide for that matter. Toys “R” Us has 879 Toys “R” Us and Babies “R” Us stores in the United States, and 815 international stores, as well as 255 licensed stores in other countries. As a consumer, what you can do is wait – and hope – for a closing down sales at a store near you.