After a few short weeks of speculation and news reports of a possible bankruptcy, Toys R Us filed for Chapter 11 bankruptcy Monday evening. At nearly 70-years-old, the big box toy retailer has been laboring under a multi-billion debt load for more than a decade since its leveraged buyout by a group of private equity firms in 2005.
- Many analysts thought the retailer had enough liquidity to make it through the holiday season and meet a debt maturity due next year. But in a document filed Tuesday, Toys R Us CEO David Brandon said that reports about the company hiring law firm Kirkland & Ellis to advise on its debt helped precipitate a crisis. Brandon said that 40% of the company's vendors refused to ship to the retailer without cash-on-delivery payments or other strict terms after a Sept. 6 story broke about a possible bankruptcy filing.
- The company said in a press release it had a commitment from existing lenders led by JPMorgan for $3 billion in bankruptcy financing that would keep Toys R Us stores open and stocked through the bankruptcy process as the retailer tries to reduce its debt load.
The timing of the Toys R Us' Chapter 11 filing might come as a surprise, even to the people who study bankruptcy risk for a living. But it represents a dramatic turn in a long, slow-burning crisis for the retailer, which has undergone several turnaround attempts and restructured its debt multiple times.
Many saw the company's $5 billion debt load — a legacy of its acquisition by Kohlbergon Kravis Roberts, Bain Capital Partners and Vornado Realty Trust — as unsustainable, especially in a quickly evolving retail world and toy market. Toys R Us has been trying to compete against mass merchants, who have put pricing pressure on the retailer, and online players such as Amazon. The company just this summer revamped its website, but has been struggling for years with declining store sales.
In a document filed Tuesday, Brandon said the company's debt service payments have been gobbling up approximately $400 million in cash annually, making it impossible to keep up with modern competition in the toy retail market "with regard to general upkeep and the condition of our stores, our inability to provide expedited shipping options and our lack of a subscription-based delivery service."
If Toys R Us can emerge from bankruptcy with less debt and money to reinvest in its business, the process could mark a turning point. "With a reconstituted debt structure, and more predictable vendor support, Toys will have increased ability to make the investments necessary to improve its competitive position, beginning this holiday season," Charlie O'Shea, lead retail analyst for bond ratings firm Moody's, said in comments emailed to Retail Dive.
"While today's decision does not necessarily mean it is game over for Toys R Us, it brings to a close a turbulent chapter in the iconic company's history," Neil Saunders, managing director of GlobalData Retail, said in a note emailed to Retail Dive. "A combination of high debt and severe structural changes in the industry created a toxic mix against which Toys R Us had little choice but to restructure and try to put itself on a firmer footing."
Saunders pointed out to the quick rise of online toy sales penetration, to about 13.7% of the market today, and the retailer's failure to fully invest to compete in the new landscape.
"Looking ahead, lowering debt and streamlining the business should help to create a more sustainable operation," Saunders said. "However, even if the debt issues are solved Toys R Us still faces massive structural challenges against which it must battle. The jury is out as to whether it can adapt enough to survive."
Bankruptcy might have been inevitable at some point, but many expected the toy retailer to make it through this season. But Toys R Us is yet another retailer to see financial concerns quickly spiral into a crisis as its vendors became nervous. The same happened to Gymboree in the months before it filed but Toys R Us' situation escalated so quickly, it didn't even make Retail Dive's list of 10 major retailers that could go bankrupt in 2017.
And for Toys R Us, the holidays are perennially a make-or-break period for the company, accounting for about three-fourths of its profit, according to Fitch. Not having its shelves stocked with toys for Christmas would not be an option.