USA TODAY International Edition
Chances of survival dimming for Toys R Us
Reports emerge about bankruptcy, closings
The odds that Toys R Us will be able to emerge from bankruptcy are growing slimmer, according to bankruptcy and restructuring experts.
Toys R Us took a risk when it filed for bankruptcy just as its crucial holiday fourth-quarter sales period was beginning, experts said. That decision may prove to be the company’s undoing.
The company was hit by two reports Wednesday that could erode the confidence of its lender and toy vendors and derail its reorganization plan. First, CNBC reported that Toys R Us was in danger of violating the terms of its bankruptcy financing due to dismal holiday sales. Then The Wall Street Journal reported that Toys R Us was doubling the number of stores it was closing, bringing the closed store count to 400, roughly half the U.S. store fleet.
Sales in November and December reportedly declined 9%, one of the biggest holiday drops on record for the company. The weak fourth-quarter results apparently are triggering deeper cuts, including expected layoffs.
Retailers normally file for bankruptcy in January, after the holiday season, when they have holiday cash on hand to fund the restructuring. For Toys R Us, filing in September “was a huge risk because they didn’t know if that was going to scare the public away,” said Ted Gavin, managing partner of restructuring and consulting firm Gavin/Solmonese and president-elect of the American Bankruptcy Institute.
“It’s quite possible that filing beforehand led to the problems they are having now,” he said, and is causing them to close more stores “because they don’t have the funds to fund losses while they rehabilitate them.”
Increasing the number of closing stores isn’t a good sign, Gavin said, but may be needed to keep Toys R Us from hemorrhaging cash.
“It is standard restructuring and turnaround discipline that when you have to make cuts, you make the deepest cuts at the earliest point because you can always reverse them later, so that may be what they’re doing,” he said.
He likened the situation to that of a field medic.
“You have to stop the bleeding,” Gavin said. “Once you stop the bleeding and stabilize the company, you can consider options.”
Toy manufacturers say the bankruptcy filing in September confused consumers and made them think that stores had already closed or that the company was going out of business.
Restructuring experts said Toys R Us cannot survive in its current form but might live on as a smaller, more digitally savvy company.
“The Toys R Us brand has been bashed in the teeth, and it’s near the kiss of death,” said Eric Schiffer, chief executive of private equity firm The Patriarch Organization and chairman of Reputation Management Consultants.