Special Report: Goodbye Toys ‘R’ Us

March 15, 2018

toys r us exterior

People around the country are mourning the loss of a piece of their childhood today, following yesterday’s announcement that Toys ‘R’ Us will close all 800 of its U.S. stores.

The announcement comes after their bankruptcy filing in September 2017 and the failure to turn the business around during the last holiday season.

The chain employs more than 30,000 people in the U.S. and includes the Babies R Us stores.

The chain — whose history traces back to a post-World War II baby furniture store — has spent many decades as the country’s largest dedicated toy emporium. In 2017, Toys R Us accounted for roughly one-fifth of toy sales in the U.S

This is a real turning point for the toy industry. As the retail industry consolidates, only big boxes like Walmart and Target, and e-commerce giant Amazon are, generally speaking, the only places left for consumers to purchase toys.

CNBC reported that Toys ‘R’ Us accounted for 15% to 20% percent of US toy sales last year – and not all of those sales are expected go elsewhere after it closes. A Jefferies analyst estimated that the loss of Toys ‘R’ Us would cause overall toy sales to drop by 10% to 15%.

As for the cause of death, online shopping definitely added to its misery, but the company basically killed itself. Toys R Us was saddled with billions of dollars in debt. That kind of debt prohibits you from making the necessary investments in their stores. Toys ‘R’ Us CEO David Brandon conceded in an SEC filing last fall that the company had fallen behind competitors “on various fronts, including with regard to general upkeep and the condition of our stores.”

The money problems date back to well before Amazon became a threat, with their debt downgraded to junk status in 2005. (at that time, Amazon’s total sales were just 4% of what they are now). A year later the company was taken private by KKR, Bain Capital, and real estate firm Vornado. The $6.6 billion purchase left it with $5.3 billion in debt secured by its assets. It never really recovered.

Other challenges were the rise of big boxes like Walmart, whose toys sales alone dwarfed Toys ‘R’ Us in total toy sales. For comparison, toymakers Mattel and Hasbro each sold 1 billion worth of toys at Walmart last year, more than twice what they sold at Toys ‘R’ Us.

And like most retailers, Toys ‘R’ Us also lost sales to online rivals such as Amazon that offered lower prices and quick shipping.

But much of the chain’s resources were devoted to paying off that massive debt load rather than staying competitive. When Toys “R” Us filed for bankruptcy in September 2017, it disclosed it had about $5 billion in debt and was spending about $400 million a year just to service that debt.

According to The Wall Street Journal, Toys R Us owes a lot to the biggest toymakers: “Mattel and Hasbro are among Toys ‘R’ Us’s biggest unsecured creditors. Mattel is owed more than $135 million, while Hasbro is owed $59 million, according to court papers.”

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