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Toys "R" Us closing leaves workers, customers hanging

Toys "R" Us to close U.S. stores
Toys "R" Us to close or sell all of its U.S. stores 00:55

Toys "R" Us' closure marks the end of the road for the 70-year-old retailer. The reasons for the company's collapse: mismanagement, crippling debt, e-commerce and changing shopping habits, just to name three factors. 

Here's a brief look at what led to the demise of Toys "R" Us, along with some niggling issues affecting customers and workers at the 735-store chain.

Debt company walking

Toys "R" Us fell prey to a crushing debt load of $5 billion stemming from its 2005 leveraged buyout by private equity firms Bain Capital and KKR (KKR), and real estate investor Vornado Realty Trust (VNO). The deal was ill-timed, saddling the retailer with loans as shoppers were shifting their spending from big-box stores that defined the previous era in retail to the internet.

The company's current leadership only compounded its mistakes by failing to act quickly and decisively. One example: When Toys "R" Us first declared bankruptcy in September, CEO Dave Brandon vowed not to close any stores, blithely remarking that "today marks the dawn of a new era at Toys "R" Us." He was wrong. 

Amazon effect

Toys "R" Us lost market share to rivals, including Amazon (AMZN), in recent years.

"Toys are particularly vulnerable to the Amazon effect because Amazon thrives with products that are known and you can buy in lots of places," said Aaron Shapiro, CEO of digital marketing and consulting firm Huge. "Therefore people will buy just buy (them) wherever it's cheapest and the most convenient."  

Michelle Steinberg, Founder of domain Integrated, a branding firm, also said Toys "R" Us had trouble attracting employees, as Walmart (WMT) and other retailers raised wages.

What led to the demise of Toys R Us? 02:46

Let the pink slips fly

Roughly 33,000 Toys "R" Us workers in the U.S. could ultimately lose their jobs because of the company's liquidation. That would be the most retail industry layoffs since Circuit City shut down in 2009, which cost 34,000 jobs, according to Challenger, Gray & Christmas. The largest retail sector layoff since 2015 happened in 2016 when Walmart shuttered 269 stores and laid off 25,000, the career services firm says.

Puny parachute

Toys "R" Us is offering salaried and hourly employees the equivalent of 60 days in pay and benefits. That's more than many employees get when companies fail. "[T]here is no fixed rule that says, 'Thou shalt pay severance' in a total liquidation," said Stephen Selbst, chair of the restructuring and bankruptcy practice at law firm Herrick, Feinstein, which specializes in retail industry bankruptcies. 

If it makes rank-and-file workers at the company feel better, top executives are unlikely to get bonuses, he added.

Is my gift card still good? 

Senator Chuck Schumer, D-New York, on Thursday asked the Federal Trade Commission to ensure that Toys "R" Us honors its unused gift cards. The retailer is continuing to honor them for the next 30 days along with rewards points. 

Still, it's not clear how long that will remain the case. "As a legal matter, Toys isn't required to honor those gift cars," Selbst said. "If I had a gift card, I would use it as quickly as I could. Don't let it gather dust."

World of hurt

The bankruptcy filing doesn't cover Toys "R" Us' international business, but it's struggling, too. The company's U.K. business on Wednesday announced that it is closing its doors after failing to find a buyer -- about 3,000 people will lose their jobs. Toys "R" Us is considering combining as many as 200 of its top-performing U.S. stores with its Canadian operations, but Selbst said that would be complicated, expressing doubt it will fly. 

-- With reporting by Aimee Picchi

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