Toys 'R' Us will stay open

Toys 'R' Us is an important sales outlet for toy manufacturers such as Mattel and Hasbro.
Toys 'R' Us is an important sales outlet for toy manufacturers such as Mattel and Hasbro.PHOTO: AGENCE FRANCE-PRESSE

Toy manufacturers will likely prop up the toy store chain because it gives them a place to sell full-price toys all year round

NEW YORK • Rest easy, kids. Toys 'R' Us may toil but it is not going anywhere, at least not if the makers of Barbie and Transformers have their way.

On Monday, the toy chain filed for bankruptcy-court protection, another in a string of speciality retailers felled by Wal-Mart, Amazon and the rest of the online onslaught.

Yet, the company, which operates about 1,600 stores globally, will likely survive because manufacturers such as Mattel, Hasbro and MGA Entertainment need the last remaining toy chain.

"They are very important and people don't understand," Mr Isaac Larian, founder and chief executive of MGA, said.

"That's the only place where kids can go and just buy toys. There is no toy business without Toys 'R' Us."

For its part, the company said it does not plan to close stores and will continue normal operations at its namesake outlets, as well as Babies 'R' Us, and their websites.

Chief executive Dave Brandon stressed the company's long history with manufacturers.

"The last thing I'm worried about right now is the vendor support," he said.

In fact, many of its agreements with debt holders prohibit the company from closing stores, restricting its ability to slim down.

Its 255 stores outside the United States and Canada are not part of Monday's filing.  

In many respects, suppliers have been propping up Toys 'R' Us for years, said Moody's analyst Charlie O'Shea.

They give the chain exclusive products during the holidays and funds for promotions.

The manufacturers offer this support because they want a place to sell toys at full price, all year round.

Major brands have also been funding an overhaul of Toys 'R' Us stores by adding more featured areas for top brands such as Mattel's American Girl dolls.

During a Chapter 11 bankruptcy filing, a company continues operating to give it a chance to come up with a plan to repay at least part of its debt.

The toy chain has received a commitment of more than US$3 billion (S$4 billion) from new and existing lenders to ease its debt burden and fund operations during bankruptcy.

Toys 'R' Us filed now because 40 per cent of its vendors stopped shipping, unless they received cash on delivery.

Mr Brandon said it needed to build inventory for the holiday season, which accounts for 40 per cent of annual revenue.

That means suppliers' support for the reorganisation plan is key to emerging from bankruptcy, said Mr Noel Hebert, an analyst for Bloomberg Intelligence.

Last year, Toys 'R' Us accounted for 11 per cent of sales at Mattel and 9 per cent at Hasbro.

Further bolstering its prospects, Toys 'R' Us' underlying business, which generated US$11.5 billion in sales last year, remains solid.

Though it has not reported an annual profit since its 2013 fiscal year because of interest payments, its operating income last year actually rose 22 per cent to US$460 million.

Still, it is a far cry from the once fast-growing heyday of the Wayne, New Jersey company, founded in 1948 when Mr Charles Lazarus opened Children's Bargain Town, a baby furniture store.

In the early 1990s, sales grew at a 10 per cent annual clip; last year, they dipped 2.2 per cent. Despite early success online, the company struggled to find the money to make investments in technology.

Its main problem is debt, the legacy of a leveraged buyout more than a decade ago.

In 2005, taking the company private, Bain Capital, KKR & Co and Vornado Realty Trust loaded it with US$7.5 billion in borrowing, and the company has been hamstrung ever since.

But it is likely to remain in play.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 23, 2017, with the headline 'Toys 'R' Us will stay open'. Print Edition | Subscribe