Toys ‘R’ Us could taint Canadian unit: analysts
Ties to troubled U.S. parent could hurt reputation with suppliers, consumers
The stain of bankruptcy protection filings on both sides of the border could confuse Toys “R” Us Canada customers and spook toy suppliers already worried about the debt-plagued U.S. division, industry analysts say.
The 82-store Canadian retailer has cash on hand, solid sales growth and a healthy balance sheet overall, according to its own court submissions.
But that may not matter given that it has one-tenth the stores of its troubled U.S. parent and shares the same retail banner and supplier base.
“Culturally, anything that is owned by the U.S. and operates in Canada is still being operated out of the U.S. to a degree,” said George Minakakis, chief executive at Toronto-based retail consulting firm Inception Retail Group Inc. “You are not really autonomous, even with separate business structures.”
That point was substantiated by the Canadian unit’s filing for creditor protection on Tuesday, which revealed it had been sending surplus cash from its operations to support its U.S. parent’s cash flow needs since 2016, making $101 million in unsecured intercompany loans to the U.S. division.
Toys “R” Us Canada, despite its own relatively robust health, was forced to file for protection from its creditors in Canada as it headed into the holiday season because of its ties to the U.S. parent. At a time of the year that generates 40 per cent of its $1.08 billion annual revenue, Toys “R” Us Canada’s working capital depended upon credit and loans tied to the U.S. parent’s credit facility, the company said this week, and that immediately went into default when the U.S. division filed Chapter 11 late Monday.
Minakakis said the company’s insolvency in the U.S. might affect consumer perceptions in Canada, given that the headline news is that Toys “R” Us is going into bankruptcy protection. “The consumer says ‘When does the fire sale start?’,” he said. “I think the brand will be bruised. Bad news can lead to bad news.”
It’s clear that suppliers’ perceptions of the retailer have been affected by ongoing rumours that Toys “R” Us was in trouble.
Prior to its filing for court protection from its creditors Tuesday, a significant number of Toys “R” Us Canada’s suppliers had already reduced shipments or tried to change their existing trade terms with the retailer, according to an affidavit from Melanie Teed-Murch, president of Toys “R” Us Canada, filed in Ontario Superior Court.
“Since the media reports of a potential Chapter 11 filing, a number of suppliers have sought to reduce their potential exposure by requiring deposits, cash on delivery or compressed payment terms, putting a strain on the Canadian business’ liquidity,” Teed-Murch said.
Bruce Winder, a partner at Toronto-based Retail Advisors Network who has worked as a toy buyer for Canadian Tire, said the same principle of leading from U.S. headquarters typically goes for merchandise suppliers with subsidiaries in Canada.
“If you are a Hasbro Canada or a Mattel Canada, if your U.S. company started to change the terms of the way it dealt with Toys “R” Us, chances are you would have to do the same in Canada. Canada might be profitable, but for big guys like Hasbro, they see the enterprise as Toys “R” Us global — one large customer that is either risky or not risky.” That risk perception could also extend to Canadian customers, he said.
“It’s unfortunate, but it is hard to escape it. Customers might not want to buy gift cards or anything electronic that requires a warranty, for fear that the store might close down, or they might worry about making returns after the holiday is over in January. If something is seen as risky, why not just go to Walmart or Amazon?”