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Toys "R" Us bankruptcy filing reportedly could be in play

Hobson on retail "bloodbath"
Mellody Hobson on retail "bloodbath," growing challenges 03:25

Toys "R" Us used to dominate the American toy market. These days there is talk it may file for bankruptcy protection as it struggles against larger rivals such as, Walmart and Target.

The retailer reportedly has hired the law firm Kirkland and Ellis as restructuring consultants to help it renegotiate $446 million in debt due before the end of its current fiscal year. Even if Toys "R" Us can address the debt that's coming due this fiscal year, it still will have to deal with another $2.2 billion in debt that's due in its following fiscal year.  As of last April, Toys "R" Us had more than $5 billion in long-term debt.

"What Toys 'R' Us has been doing is extending the debt as it comes due and paying higher interest rates," said Howard Davidowitz, the head of the retail consultancy and investment bank Davidowitz & Associates, adding that such a strategy isn't sustainable. "They have got enormous debt."  

According to spokeswoman Amy Von Walter, Toys "R" Us will discuss its latest financial plans during its second-quarter-earnings conference call Sept. 26, along with company initiatives to provide "an outstanding customer experience" during the holidays both online and in its stores in coming months. Like most retailers, Toys "R" Us earns most of its profits during the holidays. The privately held chain reports its earnings since its debt is publicly traded.

Toys "R" Us announces growing losses 01:04

Many of Toys `R' Us' current woes can be traced to the $6.6 billion sale of the company in 2005 to a group of investors including private equity giants KKR and Bain Capital and Vornado Realty Trust, according to Davidowitz, adding that other chains have experienced the same problem. Officials at Kirkland and Ellis, KKR, Bain and Vornado didn't respond to requests for comment.

As a result of the biillons in debt, Toys "R" Us wasn't able to make the investments it needed to compete with its rivals in areas such as online sales, Davidowitz said. Toys "R" Us has struggled to boost web sales since then. 

After a disastrous 1999 holiday season where many consumers didn't get their gifts until after Christmas, Toys "R" Us formed a joint venture the following year with Amazon to supply the e-commerce giant with some toy products. Toys "R" Us filed suit in 2004, alleging that Amazon failed to live up to its end of the bargain. Amazon and Toys "R" Us settled the case in 2009.  

Toys "R" Us has spent about $100 million over the past few years to improve its e-commerce business. Chief Executive David Brandon told analysts last June that the company's baby products business was hurt by problems with an online registry tool and the lack of a subscription feature that would enable parents to receive regular shipments of diapers and other baby goods.

What the future holds for Toys "R" Us isn't clear.  As Davidowitz notes, the retailer still has a valuable brand that might interest a buyer, although he wasn't sure who would buy it.

As credit rating agency Moody's put it in a report last June: "We believe Toys 'R' Us remains a compelling competitive force in the toy and baby sub-segment of retail, however it is also our view that Toys' competitive position continues to suffer challenges as a result of many of its larger, better-capitalized competitors such as Walmart, Target and Amazon using toys as traffic-drivers to both brick-and-mortar locations and websites, especially during the key holiday season, which seems to begin earlier every year."

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