Will Toys “R” Us survive Chapter 11 episode?
Retailing trends, online shopping don’t bode well
Toys “R” Us is just the latest victim of a trend in consumer retail that places convenience at the forefront, but aside from uncertainties surrounding its future, perhaps the bigger question is whether this is a sign of future troubles ahead for the industry as a whole.
The retailer’s bankruptcy filing appears to be the result of a liquidity crisis that was triggered by vendor concerns that Toys “R” Us would be unable to refinance its heavy debt load. This resulted in tighter terms and a requirement that shipping would only be done following cash payments.
Retailers in North America and Europe have suffered greatly in the past decade, as shoppers spend less time in big box stores, and more time online.
“We’ve seen it in food retail and we are also seeing it in general retail,” said Michael Hewson, chief market analyst at CMC Markets UK.
While some have adapted to Amazon. com Inc.’s way of doing things, many more have not, so pain in the retail sector will likely claim more victims if industry participants don’t change how they market products, and how they deliver them.
Hewson believes many of Toys “R” Us’ problems were self-inflicted, stemming from the large amount of debt assumed when it was taken private back in 2005. That left little flexibility in terms of restructuring the business, something other major retailers like Nordstrom, Macy’s and Sears have been forced to do.
“This has been its biggest problem for the last 12 years and show why it has failed to deliver a profit in the last four years,” Hewson said, noting that margins have come under constant pressure amid heated competition from Amazon and other U. S. retailers like Wal-Mart Stores Inc.
For those that have survived, they’ve either had to operate with much tighter margins, or be overtaken by larger brands and cut costs that way.
“We don’t find this outcome surprising given the fundamentals be setting Toys “R” Us as Amazon and Wal Mart have continued to use the toy business as a loss leader and have created profitability issues for (a company) that gets almost 50 per cent of its revenue during the incredibly competitive holiday retailing season,” said Kim Noland, an analyst at Gimme Credit.
The good news is that the Chapter 11 filing will give Toys “R” Us the much- needed flexibility to improve its balance sheet, and possibly close some under-performing stores as online shopping continues to bite into the business of brick and mortar retailers.
While the bankruptcy filing is particularly concerning given that we are quickly approaching the retail sector’s busiest time of the year, the move ensures vendor shipping will continue in Canada and the U.S. during the crucial holiday period.
“However, unsecured creditors likely will see limited recoveries given all the secured financing at the bankrupt entities,” Noland said.
With approximately 1,600 locations globally, including 82 in Canada, Toys “R” Us will continue to operate, as the primary purpose of the filing appears to be the restructuring of US$ 5 billion in long-term debt. This initiative should put the company on more solid footing, and it will likely be around this time next year, but don’t expect the same experience. Toys “R” Us, like others, needs to adapt. Whether that’s offering sameday delivery, a more consumer- friendly online shopping experience, or using the help of a partner.
Either way, we’ll find out quickly if its woes were the result of poor management, and whether there is a sustainable retail business beneath all that debt.