Hamstrung by debt

Toys R Us sales woes may have been sign of what was to come

Toys R Us, trying to reorganize under bankruptcy leading into the holiday season, was seeing overall sales fall and those at established locations drop even more sharply as it was heading for a Chapter 11 filing.

Weaker sales illustrated the difficulty the retailer was having amid more intense competition from businesses such as Amazon and Walmart that can offer lower prices. Toys R Us was already hamstrung by $5 billion in debt.

The toy retailer that also owns the Babies R Us chain says that for the three months ended July 29, sales fell to $1.46 billion from $1.56 billion. Even more telling was its same-store sales, considered a key indicator of a retailer’s health. That figure tumbled 6.4 per cent in the quarter. A year earlier, those sales edged up 0.5 per cent. Toys R Us said the same-store sales decline was due to softness in the U.S. and Canadian markets. Domestically, samestore sales fell 6.8 per cent from a year earlier, and in Canada they declined 3.3 per cent.

Weaker sales illustrated the difficulty the retailer was having amid more intense competition from businesses such as Amazon and Walmart that can offer lower prices. Toys R Us, which runs around 1,600 stores, filed for Chapter 11 bankruptcy protection this month as it heads into the all-important holiday season, which makes up around 70 per cent of annual toy sales. Toys R Us has said that it has received $3.1 billion in new financing that will allow it to pay its employees and suppliers through the period.

Aside from its sales woes, the Wayne, New Jersey-based company has struggled with debt since private-equity firms Bain Capital, KKR & Co. and Vornado Realty Trust took it private in a $6.6 billion leveraged buyout in 2005. The plan had been to take the company public, but that never happened because of its weak financial performance. And the debt meant Toys R Us couldn’t invest in its business.