Can Toys R Us Survive A Bankruptcy?

Earlier this month, Toys R Us revealed they had hired a law firm to assist in potential bankruptcy proceedings.  Of course, since that time, the retailer’s vendors have seen major downgrades from Wall Street analysts.  Mattel and Hasbro, for example, saw their share values dip greatly as one of the most popular toy retail stores announced this exploration.  After all, it was only last year that Toys R Us made up approximately 10 percent of Mattle’s and Hasbro’s total business[es]. The two leading American toy companies, then, are rejoicing a bit, today, on the heels of a slight rebound after Toys R Us did, indeed, reveal bankruptcy filings.

Toys R Us been on a steady decline towards bankruptcy for the past several years as it has struggled to keep up with competitors.  Analysts, in the meantime, have cited several reasons the company has been failing and it is not just pressure from sales competitors. In addition, they say poor in-store customer service, a poor web presence, and oddly higher prices have easily contributed. When you also consider the mounting debt that continues to pile up—a lot of it dating back more than 10 years, at the 2005 leveraged buyout—and it becomes quite clear why the six-decade-old brand is in trouble.

Indeed, retail consultant Howard Davidowitz—who worked with Toys R Us between the 1980s and 90s—comments, “When you’re cursed with all this debt, there’s no way you can compete anymore. Now they’re running up and down the halls trying to pick up the pieces, but there’s no way around it: This is a very bad situation, and it will weaken the company forever.”

But this is good news, according to Toys R Us chairman and chief executive, Dave Brandon. He says, “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,” adding, “We are confident these are the right steps to ensure that the iconic Toys ‘R’ Us and Babies ‘R’ Us brands live on for many generations.”

Still, GlobalData Retail managing director Neil Saunders warns, “Even if the debt issues are solved, Toys ‘R’ Us still faces massive structural challenges against which it must battle. The jury is out as to whether it can adapt enough to survive…With the high price tag, there is often little left over — either from the child’s budget or the gifting budget of parents and family — to spend on other toys.”