Toys “R” Us suppliers bracing for impact
U.S. company’s bankruptcy sends ripple of financial woes throughout the toy industry
Within hours of Toys “R” Us’s bankruptcy filing last week, the maker of Max Tow Truck and Animal Babies Nursery sounded a financial alarm of its own: the company, Jakks Pacific, said it expected to swing to a loss this year as a result of the mega-retailer’s bankruptcy.
Toys “R” Us owes $14.06 million (U.S.) to Jakks, which posted a profit of $1.2 million last year, making the California-based toy supplier one of more than 100,000 creditors sideswiped by the toy chain’s bankruptcy in the run-up to the all-important holiday season. In total, Toys “R” Us owes $7.5 billion to a group that includes virtually every major toymaker in the U.S.: Mattel (owed $136 million), Hasbro ($59 million), Spin Master ($33 million), Lego ($32 million), Radio Flyer ($12 million), Crayola ($2.6 million).
The toy retailer’s Canadian subsidiary was granted creditor protection in the Ontario Superior Court on Sept. 19, one day after Toys “R” Us started bankruptcy proceedings south of the border.
As toymakers and suppliers decide what to do next, many say they are likely to lose millions of dollars as a result of the bankruptcy, sending a ripple of financial troubles throughout the toy industry.
This year “continues to present a challenging retail environment, which has now been further disrupted by the Toys “R” Us Chapter 11 filing,” Stephen Berman, chief executive of Jakks said in a statement. “For the past 22 years, Toys “R” Us has been one of Jakks’ most significant business partners.”
A spokesperson for Lego, which has been weathering its own financial troubles, said the company is “deeply engaged in ongoing dialogue” with Toys “R” Us as the companies try to figure out what’s next. Others said they were consulting bankruptcy attorneys and financial advisers to sort out shipments — and payments — related to holiday inventory. VTech, the maker of electronic toys and tablets, says it expects holiday sales to Toys “R” Us “to decline.” Meanwhile, a handful of smaller companies say they have already severed ties with the world’s largest toy store chain.
“We don’t want to have anything to do with them anymore — not online, not in stores, not at all,” said Linda Parry Murphy, chief executive of Product Launchers, a supplier that connects smaller toymakers with retailers. “This is a crushing blow to startups.”
The companies she represents — mom-and-pop companies that make fidget spinners, do-it-yourself slime kits, children’s nail polish and other novelty items — rely heavily on Toys “R” Us for visibility and sales, and often spend months customizing items to the retailer’s specifications.
But, she said, she has little hope that the five toymakers will receive even a fraction of the $1.2 million they are owed. “We’re bottom of the barrel when it comes to getting paid back,” she said. “They’ll get to us last, even though we’re the ones who will get impacted the most.”
Toys “R” Us is just one of more than 300 U.S. retailers to file for bankruptcy this year. The company has been on a downward spiral for years, crushed by growing competition and mounting piles of debt. Annual sales have fallen for six years in a row, and last year Toys “R” Us reported a loss of $29 million.
On Wednesday, Toys “R” US said second-quarter sales had tumbled 5 per cent to $2.17 billion, from $2.28 billion a year earlier. The company also reported a $165-million loss, and said same-store sales — a closelywatched measure of sales at stores open at least one year — fell 4.4 per cent, which it attributed to slowing demand in the U.S. and Canada.
Bankruptcy experts said the company’s future will largely depend on whether it can persuade its suppliers to keep shipping their products, particularly ahead of the holiday season, which accounts for about 40 per cent of the company’s annual sales.
“If the bankruptcy filing does not allay supplier fears and consumer fears, the holiday shopping season could be disastrous leading to, at a minimum, store closings or possibly a complete liquidation,” said Tom Arnold, a finance professor at the University of Richmond Robins School of Business. Toys “R” Us announced Monday that it had received $3.1 billion from JP Morgan and others to help pay for inventory and company investments. While some suppliers said they were optimistic that the money could help shore up the company, others said they worried about their own long-term prospects.
“The bankruptcy news cast a wide- spread panic all the way down our chain,” said the chief executive of a U.S.-based toy company that does millions of dollars in business with Toys “R” Us each year. He spoke on the condition of anonymity because negotiations with Toys “R” Us are ongoing.
“Obviously Toys “R” Us has been very insistent that we ship to them because without product for the holidays, they don’t survive,” he said, adding that he was still deciding whether to send about $4 million worth of holiday inventory.
Toys “R” Us owes the company millions of dollars — a sum that is more than three times what the company posted in profits last year, he said.
For now, the priority is to get back as much money as possible, he said. The company is already struggling to repay suppliers and is cutting back on its marketing budget for the holidays. Staff layoffs may be next, he said, adding that Toys “R” Us represents about 20 per cent of the company’s business.
“This has ruined our year,” he said. “Right now everybody is basically working out their own side deals, getting what they can. We’re not a Mattel, Hasbro or Spin Master. We’re not a multibillion-dollar company. We’re a small company that is going to end up getting pennies on the dollar.”
Some toymakers, though, said they remained optimistic about the company’s fate. Executives at WowWee, the creator of Fingerlings and MiPosaur, said were “even more bullish” about the upcoming holiday season following Toys “R” Us’s bankruptcy filing and subsequent efforts to restructure its debt.
“We’re having ongoing conversations, but we’re looking at the restructuring as a very positive thing,” said Richard Yanofsky, chief executive of WowWee.
“This is a company we’ve been working with for the better part of 25, 30 years, and we don’t expect that to change.”