Toys ‘R’ Us has filed for Chapter 11 bankruptcy protection, the latest retailer to restructure its organization after years of declining sales and traffic. As the company seeks a turnaround, it may look to its secondary brand for salvation.
Approximately 1,600 global Toys ‘R’ Us and Babies ‘R’ Us stores, as well as both brands’ e-Commerce sites, will operate as usual for now going into the critical holiday season, according to a company statement. The statement noted that the “vast majority” of its stores are still profitable.
But the retailer plans to invest $277 million from 2018 through 2021 to convert existing locations into side-by-side storefronts dedicated to toys and the Babies ‘R’ Us brand, according to a court filing. A USA Today report noted that profits were suffering in locations where Toys ‘R’ Us and Babies ‘R’ Us have been operating separately.
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Baby gear accounted for 35.9% of total domestic revenue at Toys ‘R’ Us — the biggest share of U.S. product sales — lending credence to the idea that baby products, not toys, remain the biggest differentiator for the brand. With Amazon and Walmart having captured more market share within the toy category, Toys ‘R’ Us may see this as an opportunity to highlight its baby products.
Toys ‘R’ Us plans to aid its turnaround by also investing heavy capital in digital and supply chain initiatives during the same time frame. The retailer will spend $90 million to improve its recently redesigned web presence, improve its digital customer loyalty program and integrate digital content into its stores. The retailer also will invest another $260 million to improve its ship-from-store capabilities and lower delivery time.
Toys ‘R’ Us Secures Financing To Climb Out Of $4.9 Billion Debt
Toys ‘R’ Us did not specify how many stores it plans to shutter in the future, but acknowledged in a court filing that “leases are a substantial burden” on its finances. The company hopes to renegotiate leases at lower rents. With the holiday season coming up, the retailer also is under immense pressure to give its major vendors, such as Mattel and Hasbro, clarity into its long-term viability.
The retailer hired law firm Kirkland and Ellis to help restructure the roughly $400 million in debt that is due in 2018, and hired a financial advisory firm, Lazard, to help address its debt and upcoming maturities. The retailer has $4.9 billion in total debt, with $1.7 billion of it due in 2019. The debt load stemmed from its $6.6 billion joint acquisition by private equity firms KKR and Bain Capital and Vornado Realty Trust.
A JPMorgan-led bank syndicate and a group of existing lenders have agreed to commit more than $3 billion in debtor-in-possession (DIP) financing to support operations during the restructuring. The financing will be used to:
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Continue payment of employee wages and benefits;
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Honor customer programs; and
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Pay vendors and suppliers for all goods provided on or after the filing date.
Other retailers filing for bankruptcy in 2017 include Payless ShoeSource, Gymboree, Wet Seal, True Religion, The Limited, Vitamin World, BCBG Max Azria, hhgregg, Gordmans, Gander Mountain, Rue 21, Eastern Outfitters, RadioShack, MC Sports, Alfred Angelo and Perfumania.
Toys ‘R’ Us also intends to seek protection in parallel proceedings for its Canadian subsidiary. The company’s operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing.
