Toys R Us faces an uncertain future as a
massive US$4.9 billion debt forced the toy company to file for
bankruptcy protection in US and Canada in late September.
The filing came as a surprise, and media
reports stated that it could have been triggered by news that the
retailer had hired restructuring lawyers, Kirkland & Ellis, to
explore a number of restructuring options. That being said, it was
not the first retailer to invoke Chapter 11, the likes of Gymboree,
Payless, and BCBG having already filed for bankruptcy in the first
half of the year.
While stores in Singapore and the region –
which operate under a join venture company Toys R Us (Asia) – are
not affected by this turn of events, questions still remain over
the viability of the US based parent company.
Toys R Us’ financial woes stemmed from the
$6.6 billion sale to a group of investors including private equity
firms KKR, Bain Capital and Vornado Realty Trust in 2005. Failure
to make investments on online sales in a bid to better compete
against rivals also contributed to the company’s downfall.
The company spent over US$100 million in
recent years to bolster its e-commerce business, but had yet to
bear fruit. Problems on the registry tool and a lack of a
subscription feature were some of the other deficiencies that made
it difficult for the retailer to compete against the likes of
Amazon and Walmart.
Reports of potential bankruptcy filing came on
the heels Toys R Us reporting three consecutive quarters of same
store sales decline
The restructuring push also comes at a time
when Toys R Us was feeling the full brunt of competition, as
Walmart, Target and Amazon continued to encroach on its domain. The
Wayne New Jersey-based retailer reported disappointing 2016 holiday
sales on the back of aggressive promotional
activities.
Toys R Us reported a net loss of US$164
million in the first quarter of the year, up from a net loss of
US$126 million reported last year same quarter. Same store sales in
the quarter were down by 4.1% compared to a 3.4% decline during the
2016 holiday season. The company had a total of US$301 million cash
on its balance sheet as of the end of April 29.
A decline in same store sales also came at a
time of increased popularity of electronic games apps. The emerging
trend meant most people were not buying toys like they used to,
significantly affecting Toy’s ability to ramp up sales in its
retail stores.
Aggressive discounting from big box retailers
Walmart and Target as well as a rise of e-commerce juggernaut
Amazon had also contributed to the company’s troubles on sales.
Prior to the bankruptcy filing, rating agency
S&P Global had already pushed Toys R Us credit rating deeper
into junk territory, after downgrading it to CCC+ from B-. The
downgrade reflected the agency’s concern that the company’s owners
could struggle to address debts set to mature in 2018.
“Still, with 2019 maturities looming and a
lack of clear prospects for improving operating performance, we
believe Toys’ capital structure may be unsustainable in the long
term,” S&P global in a statement.
Credit rating firm, Moody’s on
its part believed Toys R Us was still a competitive force in the
toys business, even with a surge in financial woes. However, the
firm warned that the company’s competitive position could come
under pressure as the likes of Walmart, Target and Amazon continue
to push for market share in the industry.
A well thought restructuring plan should come
into play if Toy R Us is to avoid any missteps that will continue
to give its fierce rivals a competitive edge. Any plan, in this
case, will have to address the company’s capital structure with a
view of getting rid of expensive leases.
Toys R Us has sought to address some of its
troubles by expanding its footprint into Asia in pursuit of new
marketing opportunities. A move abroad could help the company
offset a decline in same store sales in the U.S market, where
competition is at levels never seen before.
The retailer has also started to downsize its
real estate footprint as part of a cost saving strategy. The push
has already lead to the closing a Time Square flagship store.
Making stores a fun place for shopping is another strategy that
Toys R Us is relying on, as it looks to trigger customer traffic to
its outlets.
For a start, Toys R Us has secured commitment
for up to $3.1 billion in debtor-in-possession financing from its
lenders, including JPMorgan Chase & Co. The company also plans
to spend up to US$1 billion to revamp its large format stores.
One of the reasons why the company may not
collapse entirely is the fact that the larger toy industry is
rooting for it to succeed. The top 10 biggest toy manufacturers
rely on the retailer for sales, and the demise of the retailer is
not something they would wish to see.
Toys R Us’ future also depends on what its
CEO, Dave
Brandon decides to do going forward. Brandon previously
worked at private equity firms, Domino Pizza, among other
companies, and is seen as the right guy to steer the company from
the current mess.
yahoo
