Toys ‘R’ Us granted court protection
Profitable Canadian unit aims to keep all stores open as U.S. parent struggles
The solvent Canadian subsidiary of Toys “R” Us was granted court-appointed relief Tuesday to continue operating through the holidays as it disentangles aspects of its business from that of its struggling U.S. parent company.
The big-box toy retailer, which operates in Canada as the corporate entity Toys Canada with 82 stores across the country, was granted protection from its creditors in Ontario Superior Court under the Companies’ Creditors Arrangement Act after its insolvent U.S. parent company made a similar Chapter 11 filing late Monday in the United States.
The profitable Toys Canada “operates as a relatively autonomous business unit and has achieved strong financial and operational performance in recent years,” the company said in court filings. It is cash-flow positive, has had compounded annual revenue growth of five per cent in the past three years and has almost doubled net earnings in that time, the filings said, and it wants to keep all of its stores open and operating.
Indeed, the Canadian unit has been sending surplus cash from its operations to support its U.S. parent’s cash flow needs, making $101 million in unsecured intercompany loans to the troubled U.S. division since 2016.
“Toys Canada does not have any obligation for the indebtedness of the other Chapter 11 debtors, but its US$200 million revolving credit facility (approximately $93.45 million outstanding) and US$125 million secured term loan facility are provided under the wider ABL Credit Facility made available to Toys Delaware, the direct parent company of Toys Canada,” the court filings said.
The U.S. unit’s Chapter 11 Proceedings triggered a default under the ABL Credit Facility and cut off all borrowing for the Canadian unit, requiring repayment of the Canadian loans.
“Toys Canada is not in a position to repay the obligations under the Canadian loans at this time; moreover, Toys Canada has been cut off from its primary source of financing during the midst of its inventory build for the holiday season.”
The Canadian retail unit is “not immune from the issues affecting the wider Toys “R” Us enterprise,” the filings added, and suppliers worried about the health of the U.S. business “have recently sought to reduce their potential exposure to Toys Canada by requiring deposits, cash on delivery or compressed payment terms.”
Toys Canada has secured interim debtor-in-possession financing facility from a new lender, JPMorgan Chase Bank, N.A., including a new US$200-million term loan and a new US$300-million revolving credit facility to repay outstanding obligations tied to ABL Credit Facility. Justice Frederick Myers ordered a stay period to protect Toys Canada from its creditors until Oct. 19.
In the U.S., Toys “R” Us, based in Wayne, N.J., listed debt and assets of more than US$1 billion each in its Chapter 11 filing and it secured US$3 billion in financing to stay open while it restructures debts and reworks its capital structure.
Toys “R” Us joins a list of at least 18 U.S. chains that have filed for bankruptcy protection this year, including Payless ShoeSource and children’s apparel chain Gymboree Corp., in one of the most difficult years for retail since the recession.
While Walmart has long been challenging Toys “R” Us in toys on price, an increasing number of toy sales have migrated online to Amazon, whose breadth of assortment challenges the core asset of traditional category killers in multiple sectors, from cosmetics to apparel.
“There is a fairly relentless pace of competition and change,” Michael LeBlanc, principal at Toronto retail consulting firm ME-LeBlanc and Co., who noted two decades ago the so-called “category killers” such as Toys “R” Us were forecast to spell the death of smaller niche retailers.
The Canadian retail outlook has not been as dire, but weaker players have suffered in this market. In June, Sears Canada filed for court protection from its creditors and closed 59 stores, and earlier this year the owner of Tip Top Tailors restructured through CCAA and was sold to U.S.-based GSO Capital Partners. The debt-laden owners of HMV Canada announced in January that it would close the chain’s 102 stores, though in 70 locations it was replaced by the Sunrise Records chain.
Michelle Liem, toy industry analyst at market research firm NPD Group Canada, said while e-commerce is taking a bigger bite out of store-based toy sales in Canada, the store-based market remains surprisingly resilient in the fourth quarter of the year when parents buy holiday toys for their children.
“People are out at the malls then — many people still shop at brick and mortar stores for toys,” Liem said, noting online toy sales growth was slowest in the fourth quarter of last year, according to NPD’s consumer panel. E-commerce, including the online sales of retailers such as Toys “R” Us and Walmart, accounts for about 15 per cent of toy sales in Canada, she said.
People are out at the malls (in the fourth quarter) — many people still shop at brick and mortar stores for toys.