Is Toys R Us Facing Bankruptcy?

Oct 16, 2017 | Bankruptcy, Chapter 11 Bankruptcy

Geoffrey the giraffe is not happy. In fact, none of us who are a kid at heart are happy.

Do you remember the lyrics to the song?

“I don’t wanna grow up, I’m a Toys R Us kid
There’s a million toys at Toys R us that I can play with

I don’t wanna grow up, I’m a Toys R Us kid
They’ve got the best for so much less, you’ll really flip your lid

From bikes to trains to video games
It’s the biggest toy store there is

I don’t wanna grow up, cause if I did
I couldn’t be a Toys R Us kid”

Apparently, it’s not so true anymore.

There was a time if you wanted a toy – a special toy – Toys R Us was the place to go. Sure you could head over to Walmart or Kmart or even a place like Walgreens for something basic. And then you had specialty stores for certain toys.

If you wanted collectibles, it was one store.

If you wanted model airplanes and other “sciency” stuff, it was another store.

And a lot of times, if you wanted electronic toys like remote control cars, you went to Radioshack.

If you were like a lot of us who lived in small towns, you didn’t have any chain options, and not much else was available either. If that was the case, you might have to use a mail-order catalogue. It could take weeks to get your stuff.

And then there was Toys R Us. They had all of that combined – even more of it in fact – and oftentimes it was cheaper than the little guys.

But it didn’t stop there. Toys R Us even had things like diapers and baby wipes. So that budding, young family could get something for every age – even the necessaries that kids don’t really care about.

Going to Toys R Us was an adventure. It was like being a kid in a candy store. Except it wasn’t a metaphor, and it wasn’t just candy – although they had that too.

As Toys R Us maintained its marked dominance, Walmart and even Target began its insidious expansion. Gradually the stores got bigger. And along with the addition of more types of frozen burritos, extra shades of makeup, and a greater selection of nightgowns, came more isles of toys.

Now you could not only get the basics, but you could get the special toys you really wanted that could only once be found at Toys R Us. And not only could you add diapers to your shopping list just like at Toys R Us, but you could also add milk and eggs, a special outfit for the weekend, and an air filter for your Suburban.

And then there was Amazon.

People gradually became accustomed to buying their toys online. Sure you couldn’t touch it and feel it, but the picture was close enough. And instead of being like a kid in a candy store, it was like being a kid in 10 candy stores. Plus you could read reviews to see if it was a piece of junk or the perfect toy for little Timmy.

Does it come with batteries? Sometimes it’s hard to tell from the box. Sometimes you had to wait for an employee to come and try to figure it out for you. With Amazon, just hit control “F.” If your answer isn’t there, you can ask someone and they’ll email you back – all without ever getting up off of your couch.

And then there was Amazon Prime. Once that was developed, you could buy as much unnecessary junk as possible – filling your house with it in fact. You could do it without doing the tedious math in your head (or looking at the automatic calculation) to determine just how much shipping was going to cost because it was free, free, FREE!

Oh – and it comes delivered to your door in two days – even on Sundays sometimes.

So who does go to the store anymore to buy toys?

Apparently not many.

So How Did We Get Here?

Competition isn’t the only thing that’s been hard on good ol’ Toys R Us. They’ve gone down a troubled path in the last decade or so. Let’s take a look at its recent, rough road.

Brutal competition from Walmart and Amazon were an obvious problem for Toys R Us. Not willing to just sit on its hands and watch the undertow of competition pull it out to sea to an untimely, watery grave, Toys R Us made some aggressive moves.

First, Toys R Us cut prices. A price slash can be tough on the bottom line, but it can at least keep a company alive, especially when there is little else it can do to beat the competition. Toys R Us tried to undercut, or at least match what was offered price-wise at Amazon and Walmart. This would encourage a decent percentage of customers to come back to their stores, even if it meant shrinking profit margins.

Second, Toys R Us signed some exclusive deals to license products with certain toy makers. One way to guarantee nobody would go to Walmart or Amazon for certain goodies was to have toys that were only available at Toys R Us. It’s a brilliant move but only if there’s a demand for those products.

Third, Toys R Us went and bought some other toy businesses. Why not buy out the other competition in the field, especially when it comes to the exclusive licensing deals. Who else are you going to exclusively license your product with when FAO Schwartz and KB Toys were bought out by Toys R Us?

But all of this aggressive action in the name of staying relevant in the midst of competition came at a price. It was reported that the cost of slashing prices, buying up the competition, and creating exclusive license deals generated about $5 billion in debt for the company. Nothing is a stronger anchor on a company moving forward towards recovery than debt.

So What’s Bankruptcy Going to Do?

Toys R Us has officially filed for chapter 11 bankruptcy.

Is that a good thing or a bad thing?

Is Toys R Us gone for good?

Poor Geoffrey! Will he land on his feet after all of this? I hear the San Diego Zoo is nice.

Chapter 11 bankruptcy does not mean death to a company, so you can rest easy knowing that. Although, there are situations where a company does not survive chapter 11 bankruptcy. You may want to lose a little sleep over the situation. So how do we know which way it will go for Toys R Us?

Only time will tell. Not a satisfying answer? Well, that’s bankruptcy for you.

Unlike the typical, personal chapter7 bankruptcy that your neighbor Nancy filed last year, chapter 11 bankruptcy involves reorganizing debt. The court basically takes over the financial affairs of the company. It might close some stores that are not doing well. It might sell off some assets to pay off some creditors. It may also force creditors to accept only a fraction of what they are owed in the interests of keeping the company alive. The business is usually then sold to an investor who wants to take it over and continue operations. That’s how a business can survive chapter 11 bankruptcy.

What if nobody buys the business?

Then the business usually dies. Sorry Geoffrey.

There’s some good news. It was reported that Toys R Us is making some smart, strategic moves prior to filing for bankruptcy. The big one is that it has managed to come up with $3 billion prior to filing for bankruptcy. This extra money will help pay attorneys and other costs that may come up, without cutting into the bottom line so much. This money is also slated to be used for restructuring the company and fixing up some of its stores.

It was reported that Toys R Us aims to keep all 1,600 of its stores open. But if you’ve read anything in the past about other chapter 11 bankruptcies, you’d know that more than likely they will be closing some stores as part of the bankruptcy process, especially considering that the decision whether or not to keep its stores open is not entirely within their control. The court has a say, and if a store is underperforming, there is a good chance it will end up on the chopping block.

It was also reported that most locations of Toys R Us are actually profitable. But if you look at the rest of the report, (the one that discusses overall profit and loss), you’ll see that Toys R Us lost about $164 million last year. There’s some serious profit loss going on somewhere in the company.

A recent symbolic loss for Toys R Us was the closing of its Time’s Square store back in 2015. It has been replaced by a seasonal, small, holiday location. In fact, this is a common trend for Toys R Us. They often close a store and then open a small, seasonal store in a nearby mall or strip mall.

Toys Are a Problem for Everybody

In general, kids are buying fewer toys than they once did. Kids are spending more time playing Ipads and Iphones and Xboxes and less time playing with physical toys or board games. This has been an issue even for Walmart and Amazon.
Another recently reported problem has to do with the movie industry and its poorly performing summer this year. Any parent can tell you how kids’ movies cram all kinds of marketing through your children’s eyeballs. When kids’ movies do well at the box office, kids’ toys sell well at the store. This year there have been few, blockbuster kids’ movies. This will probably translate into poor Christmas sales of kids’ toys at the store.

Everybody Suffers

Reports have shown that other companies are suffering as a result of Toys R Us filing for bankruptcy. It was reported that Lego, Mattel, and Hasbro have all seen their stock prices drop after the filing. Reportedly more than 10% of their sales are through Toys R Us. If they close up shop, that’s a significant loss for each of those companies to sustain. Additionally, if they are owed any money by Toys R Us due to purchase orders and the like, they may never get fully paid for what they are owed – depending upon what the bankruptcy court decides about the distribution of the Toys R Us debt.

Magic 8 Ball Tells the Future?

All of us who are a kid at heart hope for the survival of Toys R Us. Even if you’re an old Scrooge, you may feel an ounce of nostalgia for the place and want it to stay open. As we’ve already seen, the internet provides some amazing options for toys. But until Amazon has drones that can deliver toys to your door in a matter of hours, there’s still going to be a delay from time of purchase to delivery. What about last-minute gifts? The world is full of procrastinators, but are there enough of them to keep the doors open at Toys R Us? How else are you going to buy Tiny Tim the toy he so deserves when you finally make that turnaround and learn the true meaning of Christmas? You could go to Walmart, but it still doesn’t have the selection that Toys R Us does. And just try to get in and out of Walmart in five minutes.

There’s one more thing to consider. If any company can be resurrected, surely it’s the one founded by a guy named Charles Lazarus.

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