Toys R Us files for bankruptcy protection as the holiday shopping season nears

Toys R Us Inc. has filed for bankruptcy reorganization, a victim of the sea change in retailing and the company’s own heavy debt burden, but said it would continue to operate as usual heading into the crucial holiday shopping season.

With its spacious, high-ceiling stores that hold thousands of items, Toys R Us pioneered the big-box format for toy sales and once was the go-to destination for people shopping for toys, baby products and birthday gifts.

But like many brick-and-mortar retailers, Toys R Us was overwhelmed by consumers’ rapid shift to buying goods on the internet at sites such as Amazon.com and the severe price competition from those sites.

Although Toys R Us has its own website, it failed to keep pace with those of competitors such as Amazon.com Inc., Wal-Mart Stores Inc. and Target Corp.

In addition, Toys R Us is struggling under $5 billion of debt, much of it stemming from 2005 when a trio of investment firms bought the Wayne, N.J., company and took it private.

Toys R Us operates 1,695 stores, including its Babies R Us stores. All told, the company does business in 38 countries and employs 65,000 people worldwide.

With its filing under Chapter 11 of the U.S. bankruptcy laws late Monday, Toys R Us remains open but is protected from creditors’ claims while it works out a court-supervised reorganization plan.

Toys R Us did not announce any store closures — “in fact, we will be announcing our seasonal hiring push and expect to hire thousands of employees in the coming months,” spokeswoman Jessica Offerjost said in an email Tuesday.

The company’s filing came in U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond. Toys R Us said its Canadian unit also intended to seek reorganization in the bankruptcy court in Ontario.

Toys R Us has 259 licensed stores outside of the United States and Canada that it said are not part of the reorganizations.

“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,” Chief Executive David Brandon said in a statement.

He said the company already had received a commitment from lenders for more than $3 billion in financing that would help ensure that Toys R Us stores remained stocked with products and that they “continue to be delivered to stores in a timely fashion.”

“Our customers around the world can continue to count on an outstanding shopping experience and excellent service whenever, wherever and however they choose to shop with us,” he said.

Toys R Us follows several other retail chains that have sought bankruptcy protection because of the shift in retail spending habits, including shoe chain Payless ShoeSource Inc., children’s clothing seller Gymboree Corp. and jeans retailer True Religion Apparel Inc.

Toys R Us’ filing was not entirely surprising; there had been rumors for weeks that it might seek bankruptcy protection, and its top executives had warned in recent months that the chain was struggling.

In call with analysts in June about the company’s fiscal first quarter, which ended April 29, Brandon said that the retail changes toward e-commerce “continue to create significant challenges” and that there was “very, very aggressive pricing online.”

He also noted that Amazon, Wal-Mart and other online vendors were offering free shipping in many situations and that standard two-day shipping was becoming commonplace, resulting in “a very difficult quarter” for Toys R Us.

A sales slowdown at Lego Group, one of the leading toy makers, also hurt the toy seller. Earlier this month, Lego said its revenue for the first half of this year fell 5 percent from a year earlier — its first revenue decline in 13 years.

Toys R Us was “seeing significant weakness in demand for their products globally,” Brandon said in June.

Lego said it would keep working with Toys R Us during its bankruptcy “to ensure an optimal solution is reached” for continued Lego sales and “balancing our commitment to them while responsibly managing our business.”

Hasbro Inc., the maker of Play-Doh and Transformers and My Little Pony toys, said it was declining to comment while it’s “in the process of evaluating the terms of the Toys R Us bankruptcy filing and until we have a full understanding of the terms and their impact to Hasbro.”

A spokesperson for Mattel Inc., which makes Barbie and Hot Wheels, could not immediately be reached for comment.

Toys R Us traces its roots to 1948, when founder Charles Lazarus opened a baby furniture store in Washington. He later began selling toys as well and adopted the Toys R Us name in 1957, with the backward R in the logo to give the impression a child had written it.

By the time Lazarus retired in 1994, the company had grown to more than 1,000 stores.

Toys R Us was taken private in 2005, acquired by the investment firms Bain Capital, KKR & Co. and Vornado Realty Trust in a deal financed mostly with debt. The plan had been to take the company public, but that never happened because of its weak financial performance.

Although toy sales overall have held up fairly well, they are shifting toward discounters and online companies. U.S. toy sales rose 6 percent last year on top of a 7 percent increase in the prior year, according to NPD Group Inc., a market research firm. That was the biggest increase since 1999 and was fueled by sales of toys related to several blockbuster movies.

But for the first half of 2017, sales rose 3 percent. 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 percent annual increase.

 

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