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Facing increased competition from big box retailers and e-commerce, Toys 'R' Us, the world's largest pure play toy retailer, is restructuring its U.S. and Canada operations, filing for Chapter 11 bankruptcy in the U.S. and seeking protection under the CCAA in Canada.
April 6, 2018
NORTH AMERICA-Facing increased competition from big box retailers and e-commerce, Toys 'R' Us is restructuring its U.S. and Canada operations, filing for Chapter 11 bankruptcy in the U.S. and seeking protection under the CCAA (Companies' Creditors Arrangement Act) in Canada.
The company has been crippled by debt since it was acquired by private equity firms in a leveraged buyout in 2005.
The bankruptcy announcement comes as little surprise, with reports surfacing less than two weeks ago that the retailer had hired restructuring advisors from the law firm Kirkland & Ellis.
The retailer's operations outside of the U.S. and Canada, including approximately 255 licensed store fronts and its joint venture partnership in Asia, are not a part of the bankruptcy proceedings. The company says that the "vast majority" of its 1,600 storefronts worldwide are profitable, but a reconsideration of its physical footprint in markets across North America is likely in the cards.
In a statement released Tuesday morning, the retailer said that all Toys 'R' Us and Babies 'R' Us locations and websites would remain open during the proceedings, which fall during the critical holiday period, when the retailer makes the bulk of its sales for the year.
Toys 'R' Us is the world's largest pure play toy retailer, but currently has close to $5 billion in debt. The company plans to use the bankruptcy proceedings to restructure this debt and "establish a sustainable capital structure that will enable it to invest in long-term growth.
“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,” says Dave Brandon, chairman and chief executive officer, Toys 'R' Us. “Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet, which will provide us with greater financial flexibility to invest in our business, continue to improve the customer experience in our physical stores and online, and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide.
"We are confident that these are the right steps to ensure that the iconic Toys 'R' Us and Babies 'R' Us brands live on for many generations. As the holiday season ramps up, our physical and web stores are open for business, and our team members around the world look forward to continuing to put huge smiles on children’s faces."
The company has received a commitment for more than $3 billion in debtor-in-possession financing from various lenders, including a JPMorgan-led bank syndicate and certain of the company’s existing lenders, which is expected to immediately improve the company’s financial health and support its ongoing operations during the court-supervised process.
Toys are a critical category in the licensing industry. According to LIMA’s recent Global Licensing Survey, the toy sector is the second largest segment in brand licensing (after apparel), accounting for 13 percent of global retail sales of licensed merchandise, and totaling more than $35 billion in 2016.
Both Toys ‘R’ Us and Babies ‘R’ Us remain power players in the kids’ space, but in recent years the company has faced intense competition from big box retailers like Walmart and Target and e-commerce giant Amazon.
Following a disappointing 2016 holiday season, where same store sales dropped 3.4 percent, the retailer reported a net loss of $164 million in the first fiscal quarter of 2017. Toys ‘R’ Us will release is second quarter earnings next week.
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