Toys “R” Us has filed for bankruptcy protection in the United States and says it intends to follow suit in Canada.
The company filed Chapter 11 documents late Monday in U.S. Bankruptcy Court in Richmond, Virginia and says its Canadian subsidiary plans to seek protection in parallel proceedings under the Companies’ Creditors Arrangement Act in the Ontario Superior Court of Justice.
The chain also said it had secured US$3 billion in financing to stay open while it restructures its outstanding debt and establishes a sustainable capital structure to invest in long-term growth.
Toys “R” Us said the “vast majority” of its approximately 1,600 Toys “R” Us and Babies “R” Us stores around the world and its web portals continue to operate as usual.
The company added that it is committed to working with its vendors to ensure inventory levels are maintained and products continue to be delivered.
The company said operations outside of Canada and the U.S., including some 255 stores in Asia, are separate entities and are not part of the Chapter 11 filing and CCAA proceedings.
“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,” said chairman and CEO Dave Brandon in a statement.
“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.”
Toys “R” Us is headquartered in Wayne, N.J., and has nearly 65,000 employees worldwide.
The company said the proceedings are a way for Toys ‘R’ Us to work with its creditors on restructuring the debt beleaguering it. And it emphasized that its stores worldwide will remain open and it will work with suppliers and sell merchandise.
Filing for bankruptcy protection “will provide us with greater financial flexibility to invest in our business … and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide,” Brandon said in the announcement.
The move comes at a critical time leading into the holiday season that is crucial to retailers’ bottom lines. The company said it was “well stocked as we prepare for the holiday season and are excited about all of our upcoming in-store events.”
Retailers of all kinds are struggling. The Toys ‘R’ Us bankruptcy filing joins a list of at least 18 others since the beginning of the year — including shoe chain Payless Shoe Source, children’s clothing chain Gymboree Corp. and the True Religion jean brand — as people shop less in stores and more online.
“Toys ‘R’ Us had little choice but to restructure and try to put itself on a firmer footing, said Neil Saunders, managing director of GlobalData Retail. However, he added, “even if the debt issues are solved, Toys ‘R’ Us still faces massive structural challenges against which it must battle.”
Toys ‘R’ Us, a major force in toy retailing in the 1980s and early 1990s, started losing shoppers to discounters like Walmart and Target and then to Amazon. GlobalData Retail estimates that in 2016 about 13.7 per cent of toy sales were made online, up from 6.5 per cent five years ago.
And children are increasingly moving more toward mobile devices as playthings. “For many children, electronics have become a replacement or a substitute for traditional toys,” Saunders said.
Toys ‘R’ Us has struggled with debt since private-equity firms Bain Capital, KKR & Co. and Vornado Realty Trust took it private in a $6.6 billion leveraged buyout in 2005. The plan had been to take the company public, but that never happened because of its weak financial performance.
With such debt levels, Toys ‘R’ Us has not had the financial flexibility to invest in its business. Analysts say Toys ‘R’ Us hasn’t been aggressive about building its online business, and has let those sales migrate to rivals. And they say the company should have also thought of new ways to attract more customers in its stores, such as hosting birthday parties.
While toy sales overall have held up fairly well, they are shifting toward discounters and online companies. U.S. toy sales rose 6 per cent last year on top of a seven per cent increase in the prior year, says NPD Group Inc., a market research firm. That was the biggest increase since 1999 and was fuelled by several blockbuster movies.
But for the first half of 2017, sales rose three per cent. That puts more pressure on the later part of the year, when most toy sales occur, for the industry to meet NPD’s estimate for a 4.5 per cent annual increase. Lego is laying off 1,400 workers after saying profits and sales dropped in the first half. And the nation’s two largest toy makers, Mattel and Hasbro, reported disappointing second-quarter results.
Toys ‘R’ Us, based in Wayne, New Jersey, announced the filing late Monday. It said it was voluntarily seeking relief through the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond, and that its Canadian subsidiary would be seeking similar protection through a Canadian court in Ontario as it seeks to reorganize.
Toys ‘R’ Us said it expects to continue honouring return policies, warranties and gift cards, and customer loyalty programs should stay the same.
In a separate statement late Monday, the company said its online sales sites worldwide remain open for business during the court-supervised process.
The Canadian Press