How Toys R Us can come back
Big box chain outlines post-bankruptcy survival strategies
Toys R Us plans to close certain underperforming stores and remake others into “interactive spaces” in a bid to overhaul its drooping image after filing for Chapter 11 bankruptcy protection late Monday.
The big-box retailer did not specify how many of its 1,600 stores it plans to shutter but acknowledged in a court filing that “leases are a substantial burden” on its finances.
The company also hopes to renegotiate some leases at lower rents.
In the short term, Toys R Us will need to focus on repairing relationships with suppliers that recently demanded cash-on-delivery for toys after reports surfaced of the company’s potential bankruptcy.
But the retailer’s long-term survival amid intense competition from Amazon, discount chains and baby product outlets may be predicated on its ability to overhaul its stores and improve its lagging online experience.
“With any retailer these days, there is a risk of liquidation,” said Drew McManigle, a restructuring consultant at Sierra-Constellation Partners. “The question is really going to become if they can convince their creditor constituencies that they’re viable.”
Here’s how the company hopes to survive:
REMAKE EXISTING STORES.
Toys R Us plans to invest $277 million from 2018 to 2021 to convert existing locations into side-by-side storefronts dedicated to toys and the company’s Babies R Us brand, according to a court filing. In locations where Toys R Us and Babies R Us have been operating separately, profits were suffering.
SLASH DEBTS.
The company piled up billions in liabilities after a private equity venture transformed it into a private company more than a decade ago. Those debts have blocked Toys R Us from making certain investments it needs to thrive.
“They want to leave a little operating cushion in the business coming out of bankruptcy to allow them to” reinvest, Debtwire credit analyst Philip Emma said.
INTRODUCE EXPERIENTIAL SHOPPING.
“Once these initiatives are implemented, Toys R Us stores will be interactive spaces with rooms to use for parties, live product demonstrations put on by trained employees, and the freedom for employees to remove product from boxes to let kids play with the latest toys,” CEO David Brandon said in a court filing.
GIVE EMPLOYEES A BOOST.
The retailer also plans to raise wages from 2018 through 2021 because “better employees make for happier customers,” Brandon said.
IMPROVE THE WEB EXPERIENCE.
The company expects to invest $90 million to bolster its recently redesigned Web presence, improve its digital customer loyalty program and integrate digital content into its stores.
EMBRACE GAMING.
That plan includes the creation of augmented reality video games that customers can play on their smartphones while shopping at Toys R Us.
INVEST IN DELIVERY.
To expedite delivery of products in a get-it-now digital culture, Toys R Us plans to invest $260 million during that same time period to overhaul its supply chain, improve its ability to ship products from stores and lower delivery time.
BUILD ON SUCCESS WITH BABY PRODUCTS.
The company also signaled plans to transform Babies R Us into a “lifestyle brand,” without offering details of what that means.
WHAT HAPPENS FROM HERE?
All of these changes assume that a federal judge will give Toys R Us approval for its plan to re-emerge from bankruptcy.
The retailer said in a court filing that it had been worried that it would be forced to issue a warning that there was “substantial doubt” of its survival ahead of a $186 million loan payment due in May.
When a company is worth more dead than alive, bankruptcy reorganization plans can be converted into liquidation plans, which would involve selling off Toys R Us piece by piece.
Debtwire’s Emma said Toys R Us has “a reason to exist” and would benefit greatly by shedding the debt it piled for going private.
CEO Brandon believes Toys R Us has a bright future.
“Toys R Us delivers children their biggest smiles of the year,” he said.
“Toys R Us gives parents, in turn, who used to be Toys R Us kids, an opportunity to fulfill their children’s wildest dreams.”
The company, he said, “is here to stay.”