Brick & Mortar Meltdown: Toys ‘R’ Us can’t solve what’s killing it.
Bankruptcy indicators first started swirling publicly around Toys “R” Us on September 6. Unlike other retailers that have been dogged by bankruptcy rumors for years, such as Sears Holdings, Toys “R” Us threw in the towel only 12 days later, when its suppliers, fearing steep losses, reacted just as the company was trying to build its inventory before the crucial holiday sales period.
It wasn’t bondholders or banks that pulled the ripcord, but trade creditors. The US and Canadian entities filed for bankruptcy protection in order to be able to restructure their debts and stock up for the holidays with a proposed $3.1 billion in debtor-in-possession (DIP) financing.
Yet the toy industry has seen growing sales for five years in a row, hitting $20.4 billion in 2016, up from $16 billion in 2012. It’s respectable growth of around 5% a year. But TRU is getting clobbered by its competitors, including Walmart and Target, and particularly by the relentless shift to online shopping.
About 31% of all toy sales are now online, according to the Toy Association. In some key categories, the percentage is higher: video games (39%), apps (38%), and electronics (33%).
TRU is buckling under $5.2 billion in debt that its private-equity owners – Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust – piled on it after the leveraged buyout in 2005, and it did not invest sufficiently in creating a powerful online presence able to beat Amazon off its territory.
“But the immediate cause of the Chapter 11 filing was a crisis of confidence on the part of the company’s trade vendors, which historically has been a risk for retailers, particularly as they build inventory levels for the holiday season,” explained Stephen Selbst, chair of the law firm, Herrick’s Restructuring & Bankruptcy Group.
And when bankruptcy indicators became public, it happened fast. Selbst:
According to the company, the reaction among the vendor community was swift and brutal: within a week nearly 40% of its trade vendors put the company on COD status and many factors and credit insurers withdrew support. Prior to this crisis, Toys “R” Us had experienced an historic average of 60 days of trade credit support; the new terms would have required an immediate infusion of up to $1 billion in new cash, money that Toys “R” Us neither had nor could obtain.
Trade financing will likely be resolved with the proposed $3.1 billion in DIP financing. The longer-term problems are not so easily solved:
In papers filed with the Bankruptcy Court, Toys “R” Us chief executive David Brandon admitted that the debt service obligations have harmed company’s ability to compete: “As a result, the Company has fallen behind some of its primary competitors on various fronts, including 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 failed to capitalize on the iconic Toys “R” Us brand and its unique position as a one-stop shop for toys every day year round.”
The Chapter 11 filing did not mention any additional store closings, shrinking its footprint, withdrawing from unprofitable markets, or selling or liquidating its business. Instead, it wants to use the DIP financing to improve its stores and operations. But Selbst explains:
[N]early all retailers that file for bankruptcy end up closing stores, in part because Chapter 11 gives management the opportunity to reject leases for unprofitable stores. Given the large number of stores Toys “R” Us operates, it is likely that there are some weak performers in the mix, so it is probable that Toys “R” Us will shrink its U.S. and Canadian footprint while in bankruptcy.Debtors are often unrealistically optimistic at the start of their bankruptcy cases about what they can achieve in Chapter 11 and the level of goodwill they have banked with their creditors. The long experience of retailers in Chapter 11 suggests that very few of them are able to reorganize; most liquidate or are sold in bankruptcy.
Numerous retailers that filed for Chapter 11 bankruptcy to restructure their debts and operations ended up liquidating. And a number of retailers that successfully emerged from bankruptcy ended up filing for bankruptcy a second time, which usually ends in liquidation. Here’s a recent sampling:
American Apparel, a manufacturer with 110 retail stores, filed for the second time in January 2017, after it had emerged from its first bankruptcy in October 2015. The second time, the only thing that survived was the name, whose rights Canadian apparel maker Gildan Activewear acquired for $88 million.
Hancock Fabrics filed for bankruptcy for the second time in February 2016, after having emerged from bankruptcy in 2008. It ended up closing all its 255 stores and liquidating. Arts and crafts retailer Michaels Cos. acquired its name for $1.3 million.
Wet Seal filed for the second time in February 2017, and closed all its remaining 137 stores. The teen fashion retailer had filed for the first time in January 2015, shortly after it closed 338 of its stores and laid off 3,700 employees.
Eastern Outfitters, the parent of discount chain Bob’s Stores and outdoor retailer Eastern Mountain Sports, filed for bankruptcy in February 2017. Its owner, private equity firm Versa Capital Management, had acquired Bob’s and Eastern Mountain Sports during the bankruptcy in 2016 of its previous owner, Vestis Retail Group.
RadioShack, which long ago had 7,200 stores, filed for bankruptcy for the second time in March 2017, and announced that it would close 1,000 stores, leaving only about 70 stores on the active list, after having filed for the first time in February 2015. The current bankruptcy is still tangled up in court over a lawsuit against its former partner Sprint. But preliminarily, the court approved a plan where the surviving entity has an online presence, warehouses, a few company-owned stores, and a gaggle of independent Radio Shack dealers. If the lawsuit against Sprint does not produce a large enough a settlement with which to re-pay creditors, that deal too could be off.
So Toys “R” Us faces daunting odds to survive over the next few years. Given the financial backing it has via the proposed $3.1 billion in DIP financing, it is likely that it will successfully emerge from bankruptcy. But it has not solved the issues that are killing it: Declining sales and loss of market share in a growing market.
It’s well over a decade late trying to create a powerful internet presence to fight off Amazon, Walmart, and Target. Its brick-and-mortar business is doomed, even if it fixes up its run-down stores: 31% of toy sales in the US are already online. That percentage is growing rapidly, as toys are shifting to electronics, apps, and video games. And it would take a major miracle for Toys “R” Us to build a powerful online presence a decade after it should have.
But Walmart is on the bleeding edge of “in-fridge delivery.” Read… Big Brother Walmart Tries to “Help” You: “It’s Like Magic”
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Just another reason to ban leveraged buyouts where corporate raiders load the company with debt and strip it of cash
If leveraged buyouts are banned where will the Republican Party get their Presidential candidates (e.g., Mittens the Kitten Romney, Carly “Not So Lucent” Fiorina, etc.)?
Toy R Us will survive a long time after bankruptcy if I have anything to do with it. Even though I am in my 70s, I plan on driving down there tomorrow with my red wagon and pull it down the aisles while I fill it up with all the toys I can afford.
P.S. The toys are for me.
I guess we are back to the political comments (It was nice not seeing them in in the last article)
You can quit with the Republicans equal big money propaganda. Democrats are just as corporation-oriented as, if not more, than their Republican counterparts. Look at what was spent in the last election cycle.
Why would the government ban those….too much money to be made on the backs of the working class. I personally do not see any difference between leveraged buy outs and the government accounting market suspending mark to market accounting for real estate.
My list of money-related abuses runs for volumes and keeps on expanding, and that’s just the list and not the text, with categories and variations and items named as a proper taxonomy. He who said There is Nothing New Under the Sun was unfamiliar with the zealous inventiveness of financiers, accountants, economists, and statisticians, sophisticated, clever, and motivated. Those who have perused it typically escalate the assault on my decanter before proceeding more than a few pages.
All very discouraging, but it’s just a hobby.
“And it would take a major miracle for Toys “R” Us to build a powerful online presence a decade after it should have.”
But it really doesn’t have a choice. It has to. TRU has to become the on-line destination for children’s toys, video games and adult hobbies. The brand still has cache in that market. It’s doable. It requires visionary leadership. But very hard to do under the yoke of PE jackals.
If TRU had loaded up with debt and bought back their stock like everybody else they wouldn’t have these problems with the vulture capitalists. They’d have other problems.
They can change their name to “Toys Were Us” once the demise comes about.
That already happened with the PE crap. It used to be that their business is about toys, but with PE it’s financial engineering.
It’s so ironic. Americans used to criticize the Japanese for engaging in all sorts of financial engineering to goose results, but nowadays who’s doing it?
That’s what’s so sickening about the whole thing. Hypocrisy all around.
Why stay in the Toy biz at all ? Many other areas are more profitable.
Sell Drones & phones & cheap vape sprayers & soda to bring in the kids.
Sell space to Tattoo Removal shops to create a wholesome image.
Sell time on huge video game rigs, and sell the rigs.
It’s such bullshit. Kinda sad.
It’s the real estate prices, ‘Bane’ (spelling intentional), and the sales tax-free Amazon (the 14 years of it). It’s also income inequality, people having less to spend.
Rents are too high thanks to zirp and the f-ing banks.
Bane’s leveraged asset stripping should be made illegal. Corps weren’t originally designed to shield lazy, incompetent thieves who can’t run productive businesses.
Amazon went tax free for ages and still gets subsidized despite their slave wages and ‘The Jungle’-like conditions. Now they’re opening up retail stores that block shoppers from comparison shopping online. I swear I would fully support the guillotine for Bezos for this one.
The masses have far less disposable income because private debt is through the roof. Thanks zirp, healthcare, and FICA.
“Thanks zirp, healthcare, and FICA.”
Forty years of wage suppression and escalating housing costs. How did you miss that?
Corporatist pirates hate FICA and lust after it, which suggests something sinister about your choice to blame it. It’s all that keeps millions from utter destitution. Without SS and Medicare you’d have old people dying in the streets, which is the unhappy future predicted for the US anyway, along with the food riots.
Hi Walter,
It’s in there. ‘Income inequality’. “Less disposable income because of private debt’. But yeah, you’re right about wage suppression and globalism. And when I wrote ‘rents are too high thanks to zirp and f-ing banks’, residential is right there a lot with commercial real estate.
I like social security in Medicare. What I don’t like is how labor is shouldering more and more of it. Their share significantly increased in the 80’s.
You and I are definitely on the same side. You should know that my name here represents an all time great Chicago Bear. As you can imagine, it doesn’t hurt me to see the name Walter either.
Cool. Believe it or not, I played high school football against Wilbur Marshall. He went to Titusville Astronaut High and I went to the crosstown rival Titusville High. We lost 4 years in a row. And Astronaut won the state championship with Wilbur playing.
He was a massively muscled young man, an incredible athlete, and actually a very bright and nice guy.
Hey Kent,
Great comment! Thanks, dude. I can only imagine how dominant he was in high school. He dominated the NFL!
Wilber is one of the greatest linebackers of all time. It pisses me off how the Bears first didn’t re-sign him, and secondly, allegedly didn’t make good on deferred salary payments. Maybe that karma has led to zero championships since then.
He has horrible physical problems now and filed for a bk.
(I don’t like Wilber with an ‘e’ and choose to spell it otherwise.)
I recommend TRU should offload remaining assets and immediately convert to selling Patchouli-oil based products exclusively.
This is a proven fool proof recovery strategy.
“RU is buckling under $5.2 billion in debt that its private-equity owners – Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust – piled on it after the leveraged buyout in 2005,”
In all these chap 11 filings the same PE names come up, again and again.
How much longer can this be allowed to continue, before somebody labels the in congress as what they are Fraudulent Corporate asset strippers, and does something about them.
Even in the land of legalised corporate fraud, surely even this volume of repeat offending, is too much.
Congress do something about it Good luck with that They are the biggest bunch of sellouts on the planet
The litany of failures you listed reminds me of your many CRE articles. They’re all mall stores. Sears and Macy’s were the big anchors forever, but now they’re on the ropes and desperate to cancel leases.
These smaller stores were the bread and butter of the mall industry, no? I assume the sales model is to give the anchors almost whatever they want so you can attract the small guys and then retail the *%!# out of them.
Everything is a chain or a franchise. The mom & pops were bought up years ago; so who’s going to fill in the empty spaces? How many hair salons can a small town support?
What does one do with an empty mall? Bulldoze it? Abandon it? Who does one send the keys to?
Another daunting obstacle TRU faces is the extremely high monetary cost of bankruptcy. Bankruptcy lawyers and their related accomplices (accountants and the like) for large companies are very costly and are seen by large law firms as major profit centers.
How are only 38% of app purchases online? Or does buying them via one’s phone not count?
I thought state healthcare and the welfare state were just something to do with those lazy Europeans now it looks like what happens in all post-development states. Welcome to Europe, America.
Interesting video: https://www.youtube.com/watch?v=4JYUo9WKkao
It points out that they’ve had a web presence for 20 years.
“Web presence” … Safeway has had one too for decades … even a delivery option. And it has had little impact on their sales. What they need, as I said, is a “powerful” web presence to combat Amazon. That requires a lot more than just putting up a website.
HD soars. What could get wrong?
Hollowing companies is despicable yet regulators do nothing.