Was Toys ‘R’ Us Killed by Amazon? No, It Killed Itself

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Amazon.com Inc. (NASDAQ: AMZN) is blamed for traditional retail bankruptcies, store closings and layoffs. The blame will extend to the Chapter 11 filing by Toys “R” Us. In reality, the toy and game seller undermined its own success with excessive debt and a slow-motion effort toward e-commerce.

Toys “R” Us has $5 billion in long-term debt. The Chapter 11 decision was meant, among other things, to address that problem. Dave Brandon, board chair and chief executive, wrote:

Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet, which will provide us with greater financial flexibility to invest in our business, continue to improve the customer experience in our physical stores and online, and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide. We are confident that these are the right steps to ensure that the iconic Toys“R”Us and Babies“R”Us brands live on for many generations.

In the company’s most recently reported quarter, which ended April 29, the company had $2.2 billion in revenue and an operating loss of $54 million. Interest expense was $107 million. Toys “R” Us has been too hamstrung by debt to make any positive operating decisions. Its only alternative is to shrink. For the time being, it says it will keep all of its stores open. Looking back, that may be seen as a mistake, especially if holiday sales are weak.

The web presence of Toys “R” Us offers nothing that Amazon, Wal-Mart Stores Inc. (NYSE: WMT) or other large retailers that sell toys do not. Its traditional free shipping, price savings and “most popular” brands promotions are not enough to differentiate it. Toys “R” Us does not offer in-store pickup in exchange for discounts. It does not push an app to make shopping easier. It does not push a credit card. Walmart does all of these. Amazon does these and offers the additional benefits of its Prime discount and streaming media service.

To survive in a retail world with larger competitors and a crowded e-commerce market, Toys “R” Us needed to do things other than being a place to buy toys. Toys are available to many other places. Management did not understand that.