Dive Brief:

• Toys R Us has asked the bankruptcy court overseeing its Chapter 11 proceedings to allow payment of $16 million in bonuses to 17 top executives, as long as it makes certain financial targets at the holidays, according to a bankruptcy filing Wednesday. “That amount could double if management attained its ‘stretch’ goal—a result the Debtors will find very difficult to achieve,” the company said in the filing.

• Some of those executives together already received $8.2 million in retention bonuses before the toy retailer filed for bankruptcy in September. The new incentive bonuses would be on top of those, according to a report from CNN Money.

• The company defended the request as standard practice, and necessary for it to achieve a successful turnaround and retain the executives, according to the filing.

Dive Insight:

The bankruptcy court must approve this request, and it's not necessarily going to get a rubber stamp. Last year Sports Authority received major blowback for a similar demand, with the federal bankruptcy watchdog involved in that case calling the plan "unseemly" in light of how many creditors wouldn't be paid and "illusory" considering that their tasks may never be completed or will be accomplished by other employees. 

But in its filing Wednesday, Toys R Us insisted that the bonuses would be instrumental in keeping executives around to perform key duties. "The stress on the debtors' operations (and its senior management team) has been lasting and continues, as efforts continue to stabilize the worldwide enterprise and position the company to win during the all-important holiday season, where approximately 40 percent of the debtors’ annual net sales are realized," according to the filing. "[I]t is [Toys R Us]'s employees — and more particularly the senior management team — that must execute at this critical juncture and provide the foundation for a successful turnaround."

It may not help Toys R Us that its bankruptcy timing could problems with executing a restructuring plan, presumably involving some of the same executives. Just as the holiday sales season was starting to ramp up, Toys R Us found itself in a perilous position. In the days and weeks leading up to its filing, many vendors, spooked that the retailer had hired Kirkland & Ellis to advise it on options to restructure debt, began demanding strict terms for payments on product shipments. That created a sudden, unanticipated liquidity crunch for a retailer with little financial wiggle room.

"The timing of all of this could not have been worse, as the company is in the process of building holiday inventory," Toys R Us CEO Dave Brandon said in the bankruptcy filing, adding that Toys R Us generates 40% of its annual revenue in the weeks before Christmas.

"When you go bankrupt, the retailers always try to go in January," Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive. "It leaves you in a much stronger position. In January, you have the peak debt — you owe your vendors the most money — but you have all the cash because they do all the business in the last quarter."

Bankruptcy could allow a retailer in that scenario to wiggle out of some obligations to vendors while sitting on its biggest pile of cash. But with vendors balking at Toys R Us’s prospects, the company needed more debt in order to even open for the holidays.

"They do more of a percentage at the holidays than anybody on the planet. Can you imagine that? What this means is — the trade cut them off — they can’t pay their bills," Davidowitz said, who also called the timing of the retailer’s bankruptcy "badly, badly botched."

To capture as many sales as possible, Toys R Us is opening on Thanksgiving, though it's not extending its price-matching policy to the shopping weekend.