Toys ‘R’ Us Succumbs to Crushing Debt With Bankruptcy Filing

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Toys “R” Us, the largest U.S. toy store chain to file bankruptcy protection, is a victim of its own missteps as well as the turmoil engulfing the retail industry.

The Chapter 11 filing comes just as the company was gearing up for the critical holiday season, and it casts uncertainty over the future of its 1,600 stores and 64,000 employees.

Toys “R” Us, which also operates the Babies “R” Us chain, received a commitment for more than $3 billion in debtor-in-possession financing from lenders, including a JPMorgan-led bank syndicate and certain existing lenders, said the company.

The financing, subject to court approval, reassures its suppliers they will get paid for their items being shipped for the holiday season.

Chief Executive Dave Brandon said in a statement:

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.

Operations outside of the United States and Canada, including about 255 licensed stores and joint venture partnerships in Asia, which are separate entities, are not part of the bankruptcy filing, Toys “R” Us said.

Toys “R” Us was purchased for $6.6 billion in 2005 by KKR, Bain Capital and real estate investment trust Vornado Realty Trust. CNBC reports the retailer has $4.9 billion in debt, $400 million of which has interest payments due in 2018 and $1.7 billion of which is due in 2019.

Toys “R” Us is the latest company with financial troubles tied to crushing debt. In February 2006, Clifton, New Jersey-based housewares company Linens ‘n Things was taken private in a $1.3 billion acquisition by Apollo Global Management. Struggling to compete with sector leader Bed Bath and Beyond, it filed for bankruptcy protection two years later and eventually liquidated its assets.

Toys “R” Us recognized the changes occurring in retail when it forged a 10-year agreement with then-emerging e-commerce retailer in August 2000. Over the course of the pact, Amazon would commit part of its website to Toys “R” Us toy and baby products. The toy retailer would select the hot products to stock and buy the inventory. But the deal soon fell apart and dissolved into an acrimonious dispute that eventually was resolved in favor of Toys “R” Us.

Toys “R” Us hired Gerald Storch from Target in 2013 to address e-commerce concerns. At Target, Storch was credited with growing Target’s online business, and he expanded the Toys “R” Us online presence as well. Eventually Storch was hired away by Canadian retailer Hudson’s Bay. Toys “R” Us hired Brandon as CEO because of his track record of bringing companies public, such as Domino’s Pizza.

The bankruptcy filing by Toys “R” Us also is a source of concern for toy sellers Mattel Inc. (NASDAQ: MAT) and Hasbro Inc. (NASDAQ: HAS), which have had longstanding relationships with Toys “R” Us, the biggest pure-play toy company in the United States. Mattel shares plunged more than 6% yesterday but rallied in premarket trading on Tuesday. Hasbro shed 1.7% in Monday trading.

2017 has been something of a year of reckoning for brick-and-mortar stores, as Toys “R” Us joins retailers Gymboree, Payless, BCBG Max Azria and Perfumania in bankruptcy protection. These companies are closing underperforming stores and trying to revamp online operations.

Major retailers, including Macy’s and Sears, have closed hundreds of locations as they struggle to compete against discounters such as Walmart and Amazon.