THE GAME OF SURVIVAL
Industry giant Toys ‘R’ Canada has chance to rise even if its U.S. parent falls: experts
Can Toys “R” Us Canada survive if its U.S. parent company heads into liquidation and shutters its store network?
It’s a possibility, industry experts agree, but one that would hinge on finding a dedicated buyer unswayed by worries about the future of store-based retailing and willing to invest in upgrading the chain’s dated store network.
The Canadian unit, which was profitable and growing sales last September when its Wayne, N.J.based parent company filed for Chapter 11 bankruptcy, was forced to file for court-based creditor protection because of a shared credit facility with the U.S. parent.
“If there is going to be a bankruptcy liquidation in the U.S., it is possible for the Canadian operation to be spun off and sold and transferred,” Lou Brzezinski, partner at Toronto-based Blaney McMurtry LLP, who represents Toys “R” Us Canada creditors including Outset Media, a game maker owed about $250,000.
He noted that while liquidation is far from a certainty — reports this week said that the insolvent U.S. parent company was still working to reach a deal with its lenders — the Canadian unit, a standalone business with 82 stores and $1.08 billion in annual revenue, has sparked some interest.
Questions about the fate of Toys “R” Us Canada kicked into a higher gear after a Bloomberg report on Thursday suggested its American parent was preparing for a liquidation of its U.S. operations after failing to find a buyer or reach a deal to restructure its debt. A shutdown of the U.S. division had become “increasingly likely,” the report added, citing sources. The company announced in January that it would close 180 of its more than 800 U.S. stores amid its restructuring efforts.
Some Canadian subsidiaries of U.S. retailers have managed to survive their parent company’s bankruptcy, however.
In the case of The Source by Circuit City — bought by Bell Canada in 2009 and renamed a few months after parent company Circuit City Stores filed Chapter 11 in 2008 — the unit survived and thrived on its own. Linens ‘N Things Canada, however, was not so lucky, closing down its 40 stores in 2008 when its U.S. parent was in bankruptcy after failing to find a buyer.
“I could see a private equity firm going in for this,” said George Minakakis, principal at Torontobased consulting firm Inception Retail Group Inc. “They would have to be willing to improve ecommerce and to improve the stores. I always wondered why this toy store has to look like a warehouse, versus an environment where it looks like a kid could have fun?”
Toy retailer Mastermind, for one, has performed well and expanded its store base since majority owner Birch Hill Private Equity became an investor in 2010.
But beyond the prospect of store refurbishment, any prospective buyer of Toys “R” Us Canada would have to work with skittish vendors and a higher cost base. “Things would change without the U.S. business to support the Canadian unit, anything from marketing costs to merchandising costs,” without the economies of scale of a large bulk-buying parent, Minakakis said.
Market biases also figure heavily in the Canadian unit’s prospects, despite its strong balance sheet prior to filing and the strength of its growing Babies “R” Us business; investors are much more tentative now than they were even five years ago about putting capital into a retailer whose business is based in bricks and mortar.
“The toy industry remains in flux,” Gerrick Johnson, industry analyst at BMO Capital Markets, said in a research note on Friday, noting toy industry executives were concerned about the sector’s health in 2018.
“The Toys “R” Us bankruptcy, changing nature of retail, underperformance of movie toys, and the new lightspeed at which kids’ tastes change has created the highest level of trepidation and uncertainty we have seen in years, perhaps since the onset of the Great Recession.”
Shares of Mattel Inc. and Hasbro, the two largest U.S. toymakers and Spin Master, Canada’s largest toy company, all fell on Friday as the industry speculated about whether or not a liquidation of Toys “R” Us in the U.S. would occur, a move that would put pressure on 2018 toy shipments for toymakers in markets around the world. Mattel fell seven per cent and Hasbro Inc. two per cent in a broadly positive market.
On Friday, Toys“R” Us Canada said that it had no information or comment on the reports about its U.S. parent.
“Our business in Canada is operating as usual,” Clint Gaudry, vice-president of marketing and store planning, said in an emailed statement.
“We remain committed to providing customers with great service and the best assortment of merchandise in the toy and baby categories. We continue to serve our customers and honour all our customer policies and programs like Baby Registry, Gift Cards and R Club loyalty.”
The new lightspeed at which kids’ tastes change has created the highest level of trepidation and uncertainty we have seen in years, perhaps since the onset of the Great Recession.