Toys R Us suggests bankruptcy possible

With deadlines looming to pay off hundreds of millions of dollars in debt, Toys R Us has enlisted a law firm with corporate restructuring expertise to look at its options, ranging from refinancing to filing for bankruptcy protection.

The toy store giant is working with attorneys at Kirkland & Ellis to deal with $400 million in debt due by the end of this year, according to a source who was not authorized to speak publicly on the matter. Half of its debt obligation is due this fall, with the remaining $200 million due to be paid back in late December.

While bankruptcy is not inevitable or imminent, it is not out of the question, says Neil Saunders, managing director of retail consultancy GlobalData.

“If they cannot reach sensible agreements ... it is a very distinct possibility,” he said. “It would also be helpful in giving Toys R Us some flexibility to exit leases and stores they no longer want.”

But such a move could be crippling heading into the all-important holiday season, a period when many retailers earn roughly half of their annual revenue, and the time of year that should be most lucrative for the iconic toy seller.

The toy store chain’s long-term debt was $5 billion as of April 29. It had $701 million in liquidity, which included $400 million in committed lines of credit.

Toys R Us has acknowledged that it fell behind the digital curve at a time when more consumers are shopping online. It has invested nearly $100 million in its ecommerce operations in the last three years, and it recently revamped its website.

Walmart boasts that it is now the nation’s largest toy seller. Shoppers can also pick up toys by browsing online giant Amazon, other Internet sites or from other mass merchants.