Toys ‘R’ Us, the dominating mega toy retailer, announced it filed for Chapter 11 bankruptcy protection on Monday because it’s about $5 billion in debt.
I know what you are thinking.
Where will I get this holiday season “must-have” gifts, like the largest-ever Star Wars Lego set my oldest son is already dreaming of building.
Calm down, the toy store giant isn’t going anywhere, yet.
The legal move allows Toys ‘R’ Us to restructure $400 million in interest payments due in 2018. Another $1.7 billion is due in 2019.
Where did the $5 billion in debt come from?
The debt comes out of a leveraged buyout when the company sold to three investment firms in 2005: Kohlberg Kravis Roberts & Co. Group, Bain Capital and Vornado Realty Trust.
The buyout for $6.6 billion of the No. 1 toy retailer included the assumption of debt.
But New Jersey-based Toys ‘R’ Us has struggled the last decade to keep up with retailers like Target, Walmart and Amazon. It also intends to file for bankruptcy protection for Canadian stores later this month, according to a company statement.
There are 750 Toys ‘R’ Us stores and 605 Babies ‘R’ Us stores in the U.S.
CEO: ‘Today marks the dawn of a new era’
Toys ‘R’ Us CEO Dave Brandon said all 1,600 stores worldwide are “continuing to operate as usual,” and a vast majority is “profitable.”
“Today marks the dawn of a new era at Toys ‘R’ Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way.”
Brandon said the bankruptcy filing allows the company to move forward in financial flexibility, investments in customer experience and addressing the “challenging” retail marketplace advancements.
He encouraged parents to continue to shop at toysrus.com and babiesrus.com.
“As the holiday season ramps up, our physical and web stores are open for business.”
This isn’t the first time the company restructured debt and turned things around. Bankruptcy attorneys said Toys ‘R’ Us cannot bank on nostalgia to pull it out this time. “That’s just not how the world works anymore,” said Jeff Gleit, a partner at Sullivan & Worcester.
The problem, he said, is “too many stores and too many large stores.” Brick-and-mortar stores are relics of the past, and to avoid complete bankruptcy, Toys ‘R’ Us must think about consolidation and innovation.
What will restructuring look like for shoppers?
According to the company’s restructuring website, nothing changes for shoppers right now. And no store closures are listed.
I’m willing to drive to Toys ‘R’ Us, provided it has the toy I need at a decent price.
The reality is that when I order directly from LEGO, they are often cheaper and in stock.
Toys ‘R’ Us has an uphill battle to convince parents and stockholders the retailer still has a robust future.