The end is nigh for Toys ‘R’ Us as a big-box retailer.
Stores will remain open for some time with liquidation sales set to begin in a few weeks. But up to 200 U.S. stores could be spared, according to CNBC: the news outlet has reported that Toys ‘R’ Us is exploring a deal to sell its healthier Canadian business, plus its 200 best U.S. stores to a buyer, with the new entity run from Canada.
Crushed by debt and market share losses, Toys ‘R’ Us filed for bankruptcy protection in September. The goal was to emerge with fewer stores and less debt so that it could better fight rivals like Walmart Inc (WMT), Target (TGT) and Amazon.com (AMZN).
But Toys ‘R’ Us stumbled during the key holiday season, according to reports, casting new doubts on its viability. In the preceding quarter through October, comparable U.S. sales fell 7%.
Toys ‘R’ Us CEO David Brandon made the announcement about the liquidation, expected to be filed Wednesday night, to staff at Toys ‘R’ Us’s Wayne, N.J., headquarters, according to the Wall Street Journal. Brandon blamed the retailer’s vendors for failing to do enough to help it, though he didn’t specifically name them on the call.
Suppliers had withheld many toy shipments ahead of the busy holiday period because of fears that Toys ‘R’ Us’ wouldn’t pay them.
“I have always believed that this brand and this business should exist in the U.S.,” Brandon told staff. He also said vendors “will all live to regret what’s happening here.”
With Toys ‘R’ Us commanding 15% of the toy industry’s U.S. sales, he may well be correct. Manufacturers such as Mattel (MAT), Hasbro (HAS) and others will feel the pain of lost sales and also their increased reliance on a dwindling number of chains.
Toys ‘R’ Us crippling debt load goes back 13 years to a leveraged buyout by private equity firms Bain Capital and KKR & Co. with real estate investment trust Vornado Realty Trust. The chain was able to keep refinancing its debt for years, but attempts to take Toys ‘R’ Us public fizzled and its stature as market leader kept eroding.
The company had to divert hundreds of millions of dollars to servicing its debt that could have gone to improving its stores, which many consider have become drab. It could also have used the money to upgrade its e-commerce operations to better withstand Amazon’s competition.