Dive Brief:
- Reports around the financial struggles of Toys R Us have taken a sharp and dramatic turn. Multiple news organizations have written that the toy retailer could file for bankruptcy ahead of the holiday season. Further complicating things is news that vendors have reportedly scaled back shipments and are demanding better terms ahead of the holidays, a make-or-break time in the seasonal toy market. A spokesperson for Toys ‘R’ Us declined a request for comment from Retail Dive.
- Unnamed sources told the Wall Street Journal that a filing could come as soon as the next few weeks as the retailer talks with its debt holders and tries to extend a 2018 maturity. Meanwhile, the newspaper reported Friday that some vendors are demanding cash on delivery for products, which can put a crimp on a retailer’s liquidity and hasten bankruptcy.
- Bloomberg also reported last week that Lazard, which has been advising Toys R Us on its debt, has been shopping around a debtor-in-possession loan for the retailer that would allow it to stay open through a possible bankruptcy proceeding. Suppliers have pulled back as the cost of insuring shipments to Toys R Us has increased, according to the news service.
Dive Insight:
Toys R Us is yet another major retailer to go through public convulsions as it tries to clear a financial path to viability.
News of a potential bankruptcy plan and a vendor squeeze come shortly after news broke that Toys R Us had hired law firm Kirkland & Ellis as an adviser on its $5 billion debt load as the company grapples with a string of maturities. CNBC reported at the time that a bankruptcy filing was possible.
Some analysts contacted by Retail Dive saw the news of the adviser hire as something to be expected in the normal process of debt restructuring negotiations. But the chatter around a filing intensified late last week. Of course this doesn’t mean that a filing is inevitable, or the end of the road for Toys R Us — the last remaining national pure play toy chain. We’ve seen several retailers enter Chapter 11 this year with plans to shrink their debt and store footprints in attempts to emerge healthier and more nimble.
Next year’s debt maturity isn’t even the largest to come, as Debtwire analyst Philip Emma told Retail Dive earlier in September, shortly after news broke that the retailer had hired a new adviser. In fact, while the retailer's debt load is high, the company's immediate financial situation had not seemed particularly dire. Emma said that from the outside, the company seemed to have the cash and borrowing capacity to meet next year's $400 million debt maturity, which is relatively low compared to the $2.6 billion due in 2019.
"The amount of debt they have to deal with immediately is relatively small in the grand scheme of things," Emma said, adding that Toys R Us "didn't have the dynamics of a company where people are starting to ask about restructuring."
But Toys ‘R’ Us has faced declining sales for some time, and it’s debt makes determining its own fate all the more difficult. The retailer is flanked by new online players on one side and mass retailers like Target and Walmart on the other. All of them can afford to hold prices low during the holidays and then cut down their toy inventory for the rest of the year when sales are lighter.
The company’s debt obligations makes it hard for Toys R Us to compete on price, revamp stores or make other investments that could drive traffic or transform its ever-more-outdated big box model. "For a robust retailer, debt payments can be challenging," Neil Saunders, managing director of GlobalData Retail, said in comments previously emailed to Retail Dive. "For a retailer struggling to generate sales growth while, at the same time, trying to invest to remain relevant — it can be the difference between success and failure."
"Although recent digital investments have been made, the website and general e-commerce proposition are still below par," Saunders added. "By our calculations, Toys R Us continues to lose online market share in toys."
