Toys ‘R’ Us to sell off stores
Bankrupt U.S. chain hopes to get rid of Canadian operations
Toys “R” Us in the U.S. is actively pursuing a deal that would preserve the 82-store operation in Canada, according to a statement from Toys “R” Us Canada issued Thursday.
“Toys ‘R’ Us Canada’s business is managed in Canada, operates autonomously from U.S. operations, and continues to be a stable and profitable market leader in Canada,” according to a statement from the company, issued on the same day its U.S. parent was to appear in court seeking to close all 740 U.S. stores in the coming months, putting some 30,000 people out of work.
The shutdown is one of the biggest retail failures in U.S. history, brought on by unmanageable debt, online competition for sales in the toy sector, and the rising popularity of electronic games, gaming systems and mobile and online games.
But the company’s position north of the border isn’t as dire. “Toys ‘R’ Us Canada has a strong cash and liquidity position and is able to continue business operations without disruption. Toys ‘R’ Us Canada will continue to satisfy its obligations to vendors and customers … The Company continues to honour all customers programs, including gift cards and warranty, return and exchange policies,” according to the statement.
“Toys ‘R’ Us and its advisers are pursuing a going concern sale of Toys ‘R’ Us Canada and are in active discussions regarding a transaction that would result in an acquisition of the entire Canadian business. To that end, Toys ‘R’ Us is seeking approval in its Chapter 11 proceedings of a process for the sale of its equity interest in Toys ‘R’ Us Canada.”
A spokesperson for MGA Entertainment, a privately held toy and entertainment company based in California, confirmed on Wednesday that chief executive officer Isaac Larian and affiliated investors have made a bid for Toys “R” Us in Canada.
Toys “R” Us began operating in Canada in 1983 and now has 82 stores across Canada, as well as two e-commerce sites, including Babiesrus.ca.
“The interesting thing to note about Toys ‘R’ Us Canada is all the real estate they own. Someone could buy this company, flip off all the real estate and be sitting in a pretty comfortable position,” said Don Gregor, vice-president of Aurora Realty Consultants.
Gregor said that some of the valuable real estate owned by Toys “R” Us in Canada includes a site directly south of CF Sherway Gardens, a location in Vaughan, one in Kitchener, one in Barrie and another in Hamilton, opposite the Lime Ridge mall.
“This is an attractive company, just for its real estate holdings,” said Gregor, who esti- mates the value of its real estate at $150 million in Ontario alone. Toys “R” Us CEO David Brandon told employees on Wednesday that the company’s plan is to liquidate all of its U.S. stores, according to an audio recording of the meeting obtained by The Associated Press. Brandon said Toys “R” Us will try to bundle its Canadian business, with about 200 stores, and find a buyer. The company’s U.S. online store would still run for the next couple of weeks in case there’s a buyer for it.
The company is likely to also liquidate its businesses in Australia, France, Poland, Portugal and Spain, according to the recording. It’s already shuttering its business in the United Kingdom. That would leave it with stores in Canada, central Europe and Asia, where it could find buyers for those assets.
Toys “R” Us Asia Ltd. has more than 400 retail outlets in Brunei, China, Hong Kong, Japan, Macau, Malaysia, the Philippines, Singapore, Taiwan and Thailand. It is a Hong Kongbased joint venture with the Fung Group, which owns a 15per-cent stake. It also controls Asian sourcing giant Li & Fung, a major supplier to Western retailers such as Walmart.
When Toys “R” Us initially announced it was filling for bankruptcy protection last year, the Asian venture said it was not affected and operated as a separate legal entity independent of other Toys “R” Us businesses around the world.
In Hong Kong, where Toys “R” Us has 15 stores, parents said there were few other choices in a retail market dominated by a few big players.
“If you want something like a mainstream toy shop, then Toys ‘R’ Us is the only place you can go,” said Ching-yng Choi, whose home and office are both within walking distance of Toys “R” Us shops.
“Basically either it’s Toys ‘R’ Us or you go to specialized and very expensive toy shops that sell, for example, wooden toys that come from very far away countries like in Europe,” she said. Toys “R” Us had about 60,000 full-time and part-time employees worldwide last year.
Brandon said on the recording that the company would be filing liquidation papers and there would be a bankruptcy court hearing Thursday.
“We worked as hard and as long as we could to turn over every rock,” Brandon told employees.
When the chain filed for Chapter 11 bankruptcy protection last fall, saddled with $5 billion in debt that hurt its attempts to compete as shoppers moved to Amazon and huge chains such as Walmart, it pledged to stay open.
But Brandon told employees its sales performance during the holiday season was “devastating,” as nervous customers and vendors shied away. That made its lenders more skittish about investing in the company. In January, it announced plans to close about 180 stores over the next couple of months, leaving it with a little more than 700 stores.
The company’s troubles have affected toymakers Mattel and Hasbro, which are big suppliers to the chain. But the likely liquidation will have a bigger impact on smaller toymakers that rely more on the chain for sales. Many have been trying to diversify as they fretted about the chain’s survival.
Toys “R” Us has been hurt by the shift to mobile devices taking up more play time. But steep sales declines over the holidays and thereafter were the deciding factor, said Jim Silver, who is editor-in-chief of toy review site TTPM.com. The company didn’t do enough to emphasize that it was reorganizing but not going out of business, Silver said. That prompted customers to stay away from its stores because they didn’t think they would be able to return gifts.
Now, the $11billion in sales still happening at Toys “R” Us each year will disperse to other retailers such as Amazon and discounters, analysts say. Other chains, seeing that Toys “R” Us was vulnerable, got more aggressive. In the U.S., J.C. Penney opened toy sections last fall in all 875 stores. Target and Walmart have been expanding their toy selections. Even Party City is building up its toy offerings.
“Amazon may pick up the dollars, but won’t deliver the experience needed for a toy retailer to survive and thrive in today’s market,” said Marc Rosenberg, a toy marketing executive.
Toys “R” Us had dominated the toy-store business in the 1980s and early 1990s, when it was one of the first of the “category killers” — stores totally de- voted to one thing. Its scale gave it leverage with toy sellers and it disrupted general merchandise stores and mom-and-pop shops. Children sang along with commercials about “the biggest toy store there is.”
But the company lost ground to discounters such as Target and Walmart, and then to Amazon, as even nostalgic parents sought deals elsewhere. GlobalData Retail estimates that nearly 14 per cent of toy sales were made online in 2016, more than double the level five years ago. Toys “R” Us still has hundreds of stores, and analysts estimate it still sells about 20 per cent of the toys bought in the United States.
It wasn’t able to compete with agrowing Amazon: The toy seller said in bankruptcy filings that Amazon’s low prices were hard to match. And it said its Babies “R” Us chain lost customers to the online retailer’s convenient subscription service, which let parents receive diapers and baby formula at their doorstep automatically. Toys “R” Us blamed its “old technology” for not offering its own subscriptions.
But the company’s biggest albatross was that it struggled with massive debt since private-equity firms Bain Capital, KKR & Co. and Vornado Realty Trust took it private in a $6.6billion leveraged buyout in 2005. Weak sales prevented them from taking the company public again. With such debt levels, Toys “R” Us did not have the financial flexibility to invest in its business.