Toys R Us Could Seek Bankruptcy Protection to Deal With Its Crushing Debt
Add Toys R Us to the list of retailers choking on a huge chunk a debt and looking for relief.
The retailer has hired a law firm, Kirkland & Ellis, specialized in restructurings such as Chapter 11 bankruptcy protection filings, to look at how to reorganize about $400 million in debt coming due next year, CNBC reported on Wednesday, citing several sources familiar with the matter.
While Chapter 11 filings are one common option to clean up one’s balance sheet and break leases, many companies seek instead to refinance their debt, restructure it or make moves such as trade debt for equity, so Toys R Us’ move doesn’t mean that one option is more likely than another at this point.
“While the decision of Toys R Us to appoint restructuring advisors is not necessarily a sign that bankruptcy is imminent, it is an indication that the company is in a very uncomfortable financial position,” said Neil Saunders, Managing Director of GlobalData Retail.
Toys R Us, which has lost a lot of its business in recent years to the likes of Amazon.com (AMZN) and Walmart (WMT) as they have slashed prices, had already said it was working with investment bank Lazard to address its debt load and undertook a refinancing last year. But as sales continue to decline and retail bankruptcies regularly make business headlines, it’s getting tough to get new financing.
“As we previously discussed on our first quarter earnings call, Toys R Us is evaluating a range of alternatives to address our 2018 debt maturities, which may include the possibility of obtaining additional financing,” Toys R Us spokeswoman Amy von Walter told Fortune in an e-mailed statement. She added that Toys R Us would likely provide an update on these matters as well as its plan to perform well during the crucial holiday season on the company’s next earnings conference call, expected in late September.
Toys R Us is owned by a pair of private equity firms Kohlberg Kravis Roberts and Bain Capital Partners as well as commercial real estate company Vornado Realty Trust. (VNO). The retailer is far from being the only private-equity owned retailer struggling with high debt and shrinking sales: J.Crew and Neiman Marcus are contending with those issues. Others like Payless ShoeSource and Gymboree have sought Chapter 11 protection this year to pare their store footprint in the hopes of making a better go of it as slimmer chains. Toys R Us owners, which bought the company in 2005 for $6.6 billion, tried in 2010 to take the company public but aborted those plans later as the business faltered.
The retailer is likely to face tough competition again this Christmas period, just as it did last year when it blamed intense promotions by competitors for a weak 2016 holiday season. Its problems have carried into this year: in its most recent quarter, U.S. same-store sales fell 6.2%. Walmart on Wednesday unveiled its 2017 holiday toy list and made clear that toys would be on the front lines of its battle plan for the holidays.
As GlobalData Retail’s Saunders said, “It suffers competition from online and physical generalists who happily discount toys to drive customer traffic and sales for stores and websites.” And that is only likely to get more intense this year.