What happens now that Toys "R" Us has filed for bankruptcy?

Michael Shulman
Toys “R” Us Canada granted creditor protection after U.S. parent begins bankruptcy proceedings

Instead of throngs of present-hunting parents, the Grinch and creditors may be coming to visit Toys “R” Us this holiday season.

The big box toy retailer filed for Chapter 11 bankruptcy protection in the U.S. on Monday and initiated similar proceedings in an Ontario court a day later.

While Toys “R” Us is struggling to cope with $5 billion in long-term debt, the company said its 82 stores in Canada, 1,600 around the world, and its websites will continue to operate business as usual.

Despite these assurances, consumers have reason to be concerned, especially as the gift-giving season approaches, according to industry expert Bruce Winder, co-founder and partner of Retail Advisors Network.

Is it really business as usual? 

Toys “R” Us has promised to keep its shelves stocked with the trendiest toys for the holiday season. The company also insists that all gift cards, warranties and returns will be honoured as usual, as will loyalty programs, such as the baby registry and the “R Club.”

“We have financing commitments to ensure normal operations throughout the (Companies’
Creditors Arrangement Act) proceedings,” said Melanie Teed-Murch, president of Toys “R” Us and Babies “R” Us Canada, in a statement.

However, Winder said if the company doesn’t secure the financing they need or renegotiate their debts to more favourable terms, they may eventually go into receivership, meaning it defaults on its loan payments and may have to undergo a supervised liquidation of its assets.

In this case, Winder said creditors with preferred financing or loans, such as suppliers, will get paid first, while consumers seeking a refund on a purchase could find themselves “at the very back of the line” and likely out of luck if Toys “R” Us goes under. The same applies for store warranties, gift cards and loyalty points.

“They could theoretically close the doors the day after Christmas, and then if you have a large toy purchase that you want to return it might be too late,” Winder explained.

“They would become a stakeholder standing in line looking for relief on the product and saying, ‘I want a refund,’ but there’s no one there to give you a refund.”

He added that customers might be able to get help from a toy supplier if a product is broken, however, if a return is for another reason they may say “Sorry, I can’t do anything for you. That’s a Toys “R” Us issue.”

If Toys “R” Us ends up attracting a buyer, Winder said the new owner would be on the hook for its liabilities.

Winder said, in particular, there’s a “fair amount of risk” with products that require more sophisticated warranties, such as video games and gift cards.

“But let’s face it almost every item could be subject to the child not wanting the item on Christmas morning or holiday morning … and that means what happens is that the parents have to go and return it,” he said.

Customers who shop at Toys “R” Us may also notice shelves look emptier than in the past, said Winder, as the toy retailer deals with the fallout from suppliers.

He said that big toymakers — such as Hasbro, Mattel and Lego — may have to implement measures that ensure they get paid like asking for cash in advance or putting Toys “R” Us on a
short credit leash. This could see the suppliers cut off shipments of products if, for example, a payment is not received on a weekly basis.

If the latter occurs, Winder said Toys “R” Us could experience lower sales as shelves will be “empty” and there’s not enough product to go around, and as word gets out the problem gets worse.

“Consumers might say, “I went to Toys “R” Us and I couldn’t find anything, so why bother I’m just going to Walmart or I’ll order it on Amazon,” he said.

So why is Toys “R” Us filing for bankruptcy in the first place?

The company said it is hoping the court-supervised proceedings will help it deal with $5 billion in long-term debt and promote growth down the road.

Furthermore, Winder said Toys “R” Us either won’t be able to or is concerned about meeting its yearly $400-million interest payment due in 2018.

He said that the goal is to renegotiate the terms and interest rate of its debt with its stakeholders, or even get some of it forgiven and restructured.

“It’s a tactic used by a number of businesses to really sort out or take a pause under a very serious situation (in order to) renegotiate with creditors and other providers,” said Winder.

“They can say, ‘If (landlords) don’t support us, we won’t be here and you’ll have to fill out all these stores.’ Or if you’re a debt holder, ‘If we’re not here, you may not get $5 billion back, you might get $1 billion, whereas if you give us better terms and do some other things, you get $3.5 billion over the long-term back.”

If successful, Winder said Toys “R” Us could free up some much need cash flow away from its burdensome debt payments to reinvest in its “tired” stores and improve their e-commerce efforts in a market where “pricing is low and the margins are tighter.”

“They’ve fallen behind because they don’t have the financial resources to reinvest in their business,” he said, noting that the retailer, like many in the industry, faces stiff competition from Amazon and other online giants.

Is this the end for Toys “R” Us?

Despite falling on hard times, Winder said bankruptcy doesn’t “necessarily” spell the end of Toys “R” Us.

If the company is able to renegotiate its financing and use the freed up funds to “aggressively change” their business model through the aforementioned measures, they stand a chance of survival.

“Things don’t look good, but it’s premature to say they’re absolutely done,” he said.

The company has $3 billion in financing to stay open while it restructures its outstanding debt and tries to promote growth.

Winder said Toys “R” Us could also get a short-term boost during the holiday season as customers rush to redeem their gift cards and loyalty points.

“Because if you don’t, you’re thinking, I’ve got 50,000 points and there’s no one around for me to collect it from. I have no recourse. Those are wasted points,” he said.

However, Winder said Toys “R” Us faces a “big risk” as about 40 per cent of toy sales happen in November and December.

He noted that if suppliers don’t offer their support and their stock runs low or customers shy away because of the risk of having no refund it could get into a “death spiral” as their sales plunge even further.