Coverage: Toys R Us headed to bankruptcy court

Toys ‘R’ Us Inc., which has struggled to lift its fortunes since a buyout loaded the retailer with debt more than a decade ago, is preparing a bankruptcy filing.

Jodi Xu Klein, Matthew Townsend and Eliza Ronalds-Hannon of Bloomberg News had the story:

The Chapter 11 reorganization of America’s largest toy chain would deal another blow to a brick-and-mortar industry that’s already reeling from store closures, sluggish mall traffic and the threat of Amazon.com Inc.

Filing for bankruptcy would allow Toys “R” Us to restructure $400 million in debt that comes due next year, potentially letting the chain rebuild as a leaner organization. The retailer has hired a claims agent, which typically helps with administering such a process, people with knowledge of the situation said last week. And its vendors have been curtailing shipments amid concern that Toys “R” Us might not be able to pay its bills.

“This filing is really a buildup of financial problems over the past 15 years,” said Jim Silver, an industry analyst and the editor of toy-review site TTPM.com. “Finally, the straw broke the camel’s back.”

Tom Hals and Tracy Rucinski of Reuters reported that shares of toy company stocks fell on the news:

Toys “R” Us declined to comment. Mattel and Hasbro did not respond to requests for comment.

Toys “R” Us is one of the three largest customers for both Mattel and Hasbro, according to the companies’ most recent annual reports. The other two are Wal-Mart Stores Inc and Target Corp.

Mattel, the world’s largest toymaker, said in its annual report that it typically makes sales on credit, without collateral, and it warned that a bankruptcy filing by any major customer could significantly affect revenue and profitability.

“If there is any kind of bankruptcy filing, it will have a major disruption for all of the toy suppliers,” said Lutz Muller, chief executive of toy retail consultancy Klosters Trading Corp. “Toys ‘R’ Us needs to have money in place to get merchandise on the shelves ahead of the holiday season.”

Ashley Lutz of Business Insider reported that the retailer made two fatal mistakes:

Here are the key mistakes.

1. “Subpar” website

Toys R Us’ website isn’t as appealing as that of competitors like Amazon or Walmart.

“Toys R Us has lost out in the digital space,” Saunders wrote in the note.  “Although recent digital investments have been made, the website and general e-commerce proposition are still below par. By our calculations, Toys R Us continues to lose online market share in toys.”

Mounting competition has already forced Toys R Us to lower prices to match Target, Walmart, and Amazon.

Failing to properly invest in e-commerce gives customers even less reason to visit.

2. Spending too much on stores

Toys R Us has huge, big box stores similar to Best Buy or Target.

These stores are expensive to staff and maintain, according to Saunders.

“Toys R Us has large, expensive stores,” Saunders writes. “These are increasingly unsuited to what consumers want and expect, and they are steadily becoming less productive and efficient.”