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Toys R Us — crushed by debt — files for bankruptcy

Toys 'R' Us Inc, the largest U.S. toy store chain, has filed for bankruptcy protection. As David Pollard reports, it's the latest sign of turmoil in the retail industry that is caught in the grip of online shopping and discount chains. (Video: Reuters)

Toy store chain Toys R Us filed for bankruptcy Monday night after struggling for years to pay down billions of dollars in debt and remain relevant in an era of online shopping.

Toys R Us been spiraling toward bankruptcy for years as it failed to keep up with competitors. Analysts cited many reasons for the company’s demise: Lousy in-store customer service, a second-rate website and prices that are often higher than at many of its big-box competitors. Add to that piles of mounting debt — much of it dating to a 2005 leveraged buyout — and it was clear, many said, that the 60-year-old brand was in trouble.

“When you’re cursed with all this debt, there’s no way you can grow or invest or compete anymore,” said Howard Davidowitz, a retail consultant who worked with Toys ‘R’ Us in the 1980s and 1990s. “Now they’re running up and down the halls trying to pick up the pieces, but there’s no way around it: This is a very bad situation.”

The company said its 1,600 Toys R Us and Babies R Us locations would operate “as usual,” and that it would work with its investors to address its debt of about $5 billion.

The filing cites $7.9 billion in debt against $6.6 billion in assets. The company has more than 100,000 creditors, the largest of which are Bank of New York (owed $208 million), Mattel ($136 million) and Hasbro ($59 million).

“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,” Dave Brandon, chairman and chief executive of Toys R Us, said in a statement. “We are confident these are the right steps to ensure that the iconic Toys R Us and Babies R Us brands live on for many generations.”

Why Toys R Us is still struggling — even as the wider toy industry booms

Toys R Us, based in Wayne, N.J., was for decades the country’s preeminent toy retailer, with a towering flagship in New York’s Times Square (now closed and a planned home to Old Navy) and a ubiquitous icon, Geoffrey the Giraffe. In 2009, it purchased competitor FAO Schwarz, but eventually closed its only store, on New York’s Fifth Avenue, citing high costs. (Apple moved into the space.)

In recent years, Toys R Us has faced mounting competition from Amazon, and big-box chains like Walmart and Target, which often offer the same toys for less money and more convenience. The company’s annual sales have fallen for six years in a row, and last year it reported a loss of $29 million. (Jeffrey P. Bezos, the founder and chief executive of Amazon, owns The Washington Post.)

At the same time, toys have become less of a priority for many children and teenagers, who would rather buy smartphones and tablets — or apps and games for those devices — than traditional playthings. Two in three young teenagers now have their own tablet or smartphone, and the majority of them said spending on those devices has become an important consideration, according to research firm GlobalData Retail.

“For many children, electronics have become a replacement for traditional toys,” said Neil Saunders, managing director of GlobalData Retail. “With the high price tag, there is often little left over — either from the child’s budget or the gifting budget of parents and family — to spend on other toys.”

The Toys R Us filing — just the latest in a string of high-profile bankruptcies — comes on the cusp of the all-important holiday shopping season. More than 300 retailers have filed for bankruptcy this year, including private-equity backed Gymboree, Payless ShoeSource and the Limited. Others, including Macy’s, Sears and Bebe have closed hundreds of stores.

Toys R Us is owned by three companies — private-equity firms Kohlberg Kravis Roberts and Bain Capital, and real estate firm Vornado Realty Trust — that bought the company for about $7 billion in 2005.

The retailer has since struggled to repay its debts. Its next payment, for $400 million, was coming due May 2018, and analysts had expressed concern that the company would come up short. Vendors grew anxious and began to demand cash payments on holiday shipments. (The company says it has secured $3 billion from JPMorgan and other lenders to help “support ongoing operations.”)

“Chapter 11 was certainly not the company’s preferred outcome,” Brandon said in the company’s filing in federal court. “The timing of all of this could not have been worse.”

Toys R Us makes about 40 percent of its annual sales — which last year were $11.5 billion — during the holiday season. Its bankruptcy filing, some say, has raised a number of concerns among suppliers and customers that could ultimately hurt holiday turnout. Last year, the company posted a 2.5 percent decrease in same-store sales — a measure of sales at stores open at least one year — during the fourth quarter, and analysts say the coming months could make or break the company.

“The big question now is, What’s going to happen this holiday season?,” said Katherine Waldock, a finance professor at Georgetown University. “Their plan is to continue acting like everything is normal, but will they be able to pull that off?”

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