The US arm of Toys R Us has filed for bankruptcy but will keep trading at least through the Christmas period.
The retailer sought Chapter 11 bankruptcy protection late Monday evening in federal court, seeking a way out of the $5 billion in debt it has racked up. It said it would keep its 1,600 Toys ‘R’ Us and Babies ‘R’ Us stores open as normal heading into the busy holiday season.
Toys ‘R’ Us has been crippled by debt since it was acquired by private equity firms KKR and Bain Capital, plus real estate company Vornado Realty Trust, in a $6.6 billion leveraged buyout in 2005. It had started the process of going public in 2010, but ultimately pulled the filing, citing “unfavorable market conditions.”
The retailer attempted to put a positive spin on the news.
“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 CEO Dave Brandon in a statement.
The company has received more than $3 billion in debtor-in-possession financing from J.P.Morgan Chase and other lenders, which will help it sustain operations during the bankruptcy process.
In the USA, Toys R Us is essentially the last chain toy retailer standing, with competitors having all disappeared over the past decade as grocery stores sell toys at a discount to attract custom.
Toys ‘R’ Us joins a parade of other retailers that have sought bankruptcy protection this year, including shoe store Payless and children’s clothing retailer Gymboree. Many other retailers have aggressively closed stores and laid off employees, instead shifting resources to online capabilities.
Analysis on the Forbes website highlights the deal that Toy R Us made with Amazon in the early noughties as a mistake that cost the toy giant, that only benefited the online discounter in the long run.
The deal was held up as a pioneer in “click-and-mortar” collaborations that would benefit both the new titans of the web and traditional retail. Instead, the deal turned sour. Amazon began allowing other toy vendors to sell through its site, complaining that Toys R Us wasn’t carrying enough stock.
Toys R Us sued in 2004, and won the right to terminate the 10-year contract and set up its own website in 2006.
But it was too little too late. Toys R Us had missed out on the journey other retailers were taking, in figuring out the world of e-commerce and building up its own, innovative presence online.
The outlook seems gloomy for the world’s most iconic toy retailer, but it has proven surprisingly resilient in the past. Though it might end up looking like quite a different company, Toys R Us may yet survive the current crisis.