In 1948 a baby furniture-retailer began operations to take advantage of the post-war baby boom. This Children’s Supermart would eventually become Toys 'R' Us, the first and biggest name in toy shopping for several generations. How times have changed indeed. Today, while still operating over 800 individual stores in the U.S. and nearly as many internationally, Toys “R” Us is no longer the leading retailer for toy and juvenile products it once was. Walmart holds that rank right now. It is also saddled with millions of dollars’ worth of debt. As the year begins to wind down, the company has been left with no choice but to file for bankruptcy.
Chapter 11
On Monday, September 18, Toys “R” Us made a filing for Chapter 11 Bankruptcy protection, an action some analysts say has been a long time coming for the toy store. This move was undertaken with just three months left to go before the lucrative holiday season. From November and December alone, retailers like Toys “R” Us have the potential of making nearly half of their average annual revenue. However, that won't make much difference to the toy retail chain with its debts of about $4.9 billion.
Despite having been acquired in 2005 by private equity investors Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust in a $6.6 billion deal, Toys “R” Us, which is headquartered in Wayne, New Jersey, was still left with about $400 million in interest payments due next year.
There is an additional $1.7 billion that will be due in 2019. The company’s chairman and CEO, Dave Brandon, says in a statement that the Chapter 11 bankruptcy filing marks the start of a new era for Toys “R” Us. He expects that the financial crisis they have been facing will soon be addressed “in a lasting and effective way."
Turnabout of fortunes
The rise of Toys “R” Us in its first few decades was a textbook example of a “category killer.” Its overspecialization in retailing toys marked the downfall of small neighborhood toy shops and medium-sized retailers.
It is ironic that the brand itself is now falling prey to a new sort of specialization. Toys “R” Us and other real-world chains like Sears find themselves losing ground to online marketplaces, led by the brick-and-mortar archenemy, Amazon. The retailer is trying to revamp its own online services in answer to that front.
The bankruptcy filing will enable Toys “R” Us to have enough financial flexibility to pull itself back from the brink of disaster. Already, Jp Morgan and several other lenders have pledged to give the veteran retailer over $3 billion in additional financing to achieve its goal.
