Toys ‘R’ Us could taint Canadian unit: analysts

Ties to troubled U.S. parent could hurt reputation with suppliers, consumers

The stain of bankruptcy protection filings on both sides of the border could confuse Toys “R” Us Canada customers and spook toy suppliers already worried about the debt-plagued U.S. division, industry analysts say.

The 82-store Canadian retailer has cash on hand, solid sales growth and a healthy balance sheet overall, according to its own court submissions. But that may not matter given that it has onetenth the stores of its troubled U.S. parent and shares the same retail banner and supplier base.

“Culturally, anything that is owned by the U.S. and operates in Canada is still being operated out of the U.S. to a degree,” said George Minakakis, chief executive at Toronto-based retail consulting firm Inception Retail Group Inc. “You are not really autonomous, even with separate business structures.”

That point was substantiated by the Canadian unit’s filing for creditor protection on Tuesday, which revealed it had been sending surplus cash from its operations to support its U.S. parent’s cash flow needs since 2016, making $101 million in unsecured intercompany loans to the U.S. division.

Toys “R” Us Canada, despite its own relatively robust health, was forced to file for protection from its creditors in Canada as it headed into the holiday season because of its ties to the U.S. parent. At a time of the year that generates 40 per cent of its $1.08 billion annual revenue, Toys “R” Us Canada’s working capital depended upon credit and loans tied to the U.S. parent’s credit facility, the company said this week, and that immediately went into default when the U.S. division filed Chapter 11 late Monday.

Minakakis said the company’s insolvency in the U.S. might affect consumer perceptions in Canada, given that the headline news is that Toys “R” Us is going into bankruptcy protection. “The consumer says ‘When does the fire sale start?’ ” he said. “I think the brand will be bruised. Bad news can lead to bad news.”

It’s clear that suppliers’ perceptions of the retailer have been affected by ongoing rumours that Toys “R” Us was in trouble.

Prior to its filing for court protection from its creditors Tuesday, a significant number of Toys “R” Us Canada’s suppliers had already reduced shipments or tried to change their existing trade terms with the retailer, according to an affidavit from Melanie Teed-Murch, president of Toys “R” Us Canada, filed in Ontario Superior Court.

“Since the media reports of a potential Chapter 11 filing, a number of suppliers have sought to reduce their potential exposure by requiring deposits, cash on delivery or compressed payment terms, putting a strain on the Canadian business’ liquidity,” Teed-Murch said.

Bruce Winder, a partner at Toronto-based Retail Advisors Network who has worked as a toy buyer for Canadian Tire, said the same principle of leading from U.S. headquarters typically goes for merchandise suppliers with subsidiaries in Canada.

Over the longer term, Toys “R” Us Canada may find it difficult to avoid the big picture narrative that is prevailing in the U.S. market and gradually changing the game in this country: that old-school “category killers” such as Staples and Toys “R” Us will inevitably see their business erode over time amid the rise of online players such as Amazon Inc., eBay Inc. and Alibaba Group Holding Ltd.

Consumer online retail sales in this country lag those of the U.S. and the U.K., the theory goes, so just because the Canadian unit of Toys “R” Us is financially strong now, that might not endure, said Ken Wong, marketing professor at Queen’s University School of Business. “There is a fear that if it happened in the States first, why wouldn’t it happen here?”