When Toys “R” Us filed for Chapter 11 in September, capping an unexpectedly sharp collapse for a company whose bonds mere months earlier were trading just shy of par, the prevailing consensus was that once the company's balance sheet is restructured, it would continue its existence without substantial operational changes and with largely the same number of stores and employees. However, in the first confirmation that the company's collapse was much more extensive than just the result of excess leverage, Bloomberg reports that Toys "R" Us is considering closing at least 100 U.S. stores - and as many as 200 - in the face of weak holiday sales. According to Bloomberg's sources, the store closures are coming after a sharp contraction in sales which declined 15% this Christmas-shopping season from a year earlier.
The Wayne, NJ-based company operated 879 U.S. stores as of the end of January, which means that between 11% and 22% of the company's store base is about to be shuttered, resulting in thousands of layoffs.
The announcement was a double whammy from the company which previously stunned bondholders when news leaked it was preparing for bankruptcy. While shutting stores is common practice for bankrupt retailers, Toys “R” Us had previously said that its Chapter 11 filing "wouldn’t herald a big retrenchment for the largest toy-store chain" according to Bloomberg. In fact, CEO Dave Brandon went so far as to say in September that the company was pushing ahead with plans to open more stores in some cities, and was contemplating extending the lease on its Times Square location, which opened in August as a temporary holiday shop.
Turns out it lied.
But it's not just Toys employees who are on the hook: the prospect of Toys “R” Us closing locations is another major blow to its biggest suppliers, Mattel and Hasbro, both of which were hammered after Toys' bankruptcy, and whose shares again fell to session lows on Monday after the news of the store closures. Mattel declined as much as 4.5% to $14.78, while Hasbro dropped 3.2% to $91.02.
As we reported previously, the toymakers have already blamed Toys “R” Us’ bankruptcy for their declining sales. Mattel, the world's biggest toymaker and maker of Barbie dolls and Fisher-Price, was hit particularly hard, with sales plunging in North America last quarter resulting in a suspension of the company's dividend.
Meanwhile, with Amazon stealing market share from every conventional retailer, and with sales continuing to tumble, Toys “R” Us may have to shut even more stores in the months ahead, which the recent Chapter 11 filing will make especially easy.
The bankruptcy process makes it easier to exit leases and shut down the company’s worst-performing locations. And the company has said that it would continue to evaluate its store fleet as part of the restructuring process.
Which means that in addition to Toys "R" Us and its suppliers, also on the hook are the numerous malls and retail outlet locations where the company's store are located, and which will soon stop paying their leases.
Ultimately, however, it is all about the toy store's turnaround, which appears to not be going as planned:
Weak holiday results threaten to complicate the retailer’s plans to get its finances in order and emerge from bankruptcy with an improved balance sheet. Before filing for bankruptcy, the company had been weighed down by roughly $5 billion in debt, stemming from a leveraged buyout last decade led by Bain Capital.
Separately, Bloomberg reported previously, Toys “R” Us has also announced plans to close at least 26 stores in the U.K., which is outside the purview of the bankruptcy. The idea there is to reduce its emphasis on warehouse-size stores, letting the company focus on better-performing small shops and online operations.