In the ’80s and ’90s, kids swarmed Toys R’ Us and K-B Toys. Perennial advertisers on the Saturday morning airwaves and in Sunday circulars, these mall-based toy stores are golden avenues of nostalgia. But they’re also staring down a world where people would rather buy online than drive to a mall, and K-B got liquidated in 2009. Eight years later, after a decade where it was mostly notable for people arguing over what was on its shelves instead of buying off those shelves, it might now by Toys R’ Us’ turn.
The problem, as CNBC lays out, has its roots in 2005. Private equity firms Bain Capital and Kohlberg Kravis Roberts, along with Vornado Realty Trust, bought the company for $6.6 billion, taking it private. At the time, the company was a “category killer,” that is, so good at selling toys it forced out both smaller toy shops and giant retailers. If that weren’t enough, it owned lots of highly valuable commercial real estate. It seemed the perfect deal.
As you might guess, much like the once-mighty Sears, the one-two punch of shifting real estate markets and ecommerce have made life less than fun at Toys R’ Us. The issue was that the 2005 deal was a leveraged buyout; the private equity firms borrowed a bunch of money to buy the company, and Toys R’ Us’ assets were the collateral against the loan. That’s left Toys R’ Us stuck with $400 million a year just in interest payments. Toys R’ Us has been holding off larger problems by refinancing its debt over the last decade, but investors are less and less interested in being on the hook if and when it collapses.
And this might not just put Geoffrey the Giraffe out of a home. This bankruptcy comes at the worst possible time not just for Toys R’ Us but for the wider toy market. Toys R’ Us is the most profitable place for toy companies to sell toys in the first place, since stores like Wal-Mart push constantly for lower prices, and the store moves 40% of its sales during the Christmas season. If toy companies don’t think Toys R’ Us is going to pay its bills, then it’ll create a death spiral where the stores will have no toys to sell, driving down sales and making it even harder for the company to pay bills.
Toys R’ Us may not be completely doomed. Companies have functioned through bankruptcy before, after all, and if Toys R’ Us can make good on its bills, it’ll have at least one more Christmas to figure out how to right the ship. But it needs to solve its problems fast, or perish.
(via Business Insider)
