Toys ‘R’ Us, once ahead of the retail game, now playing catch up – NorthJersey.com
Toys “R” Us is facing competitive pressures, and looking for new ways to survive in the new digital age.
Perfect timing helped Toys “R” Us grow from a single, tiny store into an international powerhouse over the course of 69 years.
The company got its start selling cribs and carriages just as the baby boom was about to explode. It expanded into toys as those babies grew and it realized dolls and trucks produced more repeat business than baby furniture. It opened the first toy superstores just as the age of hot toys fueled by TV ads was dawning.
But the company that billed itself as “the center of the toy universe” now finds itself behind the times in the digital age and challenged by a retail world that is playing by a whole new set of rules.
It must refinance $400 million of its crushing $5 billion debt next year with lenders who have grown less patient about waiting for results and who are less confident about the future of traditional retailers.
RENAISSANCE: Toys ‘R’ Us coming back to Times Square – for a bit
The company has hired a top restructuring firm and said it is evaluating “a range of options.” It did not dispute reports that a bankruptcy filing could be a possibility. That most likely means Toys “R” Us, which is headquartered in Wayne, is seriously weighing a significant number of store closings, and in a worst-case scenario, filing for bankruptcy protection, bankruptcy and toy industry experts said.
No one expects Toys “R” Us to disappear. But most experts agree it will need radical changes to survive. And in a world where Walmart, Target, Amazon and even drugstores and discount fashion stores like T.J. Maxx are selling toys, any missteps could help those competitors gain an edge.
Toys “R” Us faces the same core problem that has plagued other retailers that have filed for bankruptcy recently: Too many stores and too many large stores, said Jeff Gleit, a bankruptcy partner at New York law firm Sullivan & Worcester, who has worked on major retail restructurings. While Toys “R” Us could do an out-of-court restructuring and reach an agreement with its bond holders, bankruptcy may be the only solution that lets it shed excess stores, Gleit said.
“If they need to have fewer stores or smaller size stores, they’re going to end up in bankruptcy,” he said. ”It’s not that brick and mortar retail is totally done, but for large brick and mortar there’s a war going on and I don’t think they will win.”
The birth of Toys “R” Us
In 1948, Charles Lazarus returned from World War II and heard all of his war buddies talking about getting married. His instincts, Lazarus said in an Entrepreneur magazine interview in 2008, told him it was a good time to open a store that sold baby carriages and cribs. He was right. The store, in Washington, D.C., was a hit.
Those instincts proved visionary again in 1957, when Lazarus began opening toy superstores stocked with aisles and aisles of playthings just as television was taking off and fueling demand for Barbie dolls, Slinkys and Hula Hoops.
The company that Lazarus built raised generations of “Toys “R” Us kids,” but it now finds itself scrambling to convince parents like Danielle Isom, a North Bergen mother of two young children, to shop at its stores.
“I’ve maybe stepped in Toys “R” Us only two or three times since having kids,” said Isom, who writes a lifestyle and parenting blog, Making Time. She said she prefers the convenience of Amazon.com and feels the prices are better at Target and Walmart.
Toys “R” Us had the retail vision to foresee the baby boom and television-fueled toy fads, but it failed to notice two looming threats – the rise of mass merchants like Walmart and Target, who would undercut Toys on price, and the e-commerce explosion, which lets parents buy toys without leaving their homes.
“They were slow to invest in digital in terms of website, and app and selling online,” said Jim Silver, editor of TTPM, the leading toy review website.
“They’re playing catch up,” he said. “Amazon’s the clear leader. Walmart made a very smart acquisition with Jet. It gave them a lot of digital capabilities that they didn’t have. Target’s also redone their website in advance of Toys “R” Us.”
Toys “R” Us just launched new websites for its online business and Chairman and CEO Dave Brandon has told investors and analysts he expects they will help boost sales this year.
Debtors “R” Us
Toys “R” Us was a publicly traded company on the New York Stock Exchange until 2005, when two private equity firms, KKR and Bain Capital along with real estate trust Vornado bought all shares and took the company private in a $6.6 billion deal. The company was left with billions in debt.
“They have way too much debt,” Gleit said. Retail sales rise and fall with trends and fashions, and even in a bad year, Toys “R” Us still has to make large debt payments. Without debt, retailers can weather a bad year. With it, all bets are off. “Even when sales are low, they still have to make these debt payments,” Gleit said. “That’s what cripples these companies.”
For Toys “R” Us to be able to refinance its debt, it will have to convince bondholders that retail still has a robust future. Part of the consideration in any debt restructuring ”is going to be how confident are the bondholders about the idea of retail being successful again,” said Ted Gavin, managing partner of the Delaware-based restructuring and consulting firm Gavin/Solmonese and president-elect of the American Bankruptcy Institute.
The bondholders, he said, “may be more willing to cut their losses and get out,” rather than wait it out to see if Toys “R” Us can complete a turnaround.
Most analysts and industry observers who have covered Toys “R” Us for years don’t expect a collapse of the company, noting that it has successfully refinanced its debt in the past. “This is not the first time this has come up,” Gerrick Johnson, veteran toy analyst for BMO Capital Markets, told industry trade publication Kidscreen on Thursday.
Moody’s Investor’s Service, in a June 29 report, said it was renewing Toys’ stable rating, noting that it expects that “consistent with past practice, the company will expeditiously and economically address” its debt. Moody’s said Toys “R” Us has a number of key assets that help its credit position, including its strong relationships with key toy manufacturers like Hasbro and Mattel.
“We need them to survive”
One of the company’s strengths is that the toy industry is rooting for it to succeed.“You hear all the major toy companies saying ‘We need them to survive’,” said Silver. “I’ve talked to everyone in the top ten biggest manufacturers and they’re saying we’re doing everything possible to work with them to help them survive because we need them to launch items…. Toys “R” Us is good for the toy business.
That industry support means Toys “R” Us often gets first dibs on exclusives or wins a three-month head start on selling some of the hottest toys.
News reports that Toys “R” Us was weighing bankruptcy by hiring leading corporate restructuring law firm of Kirkland & Ellis sent shock waves through the toy industry last week. ”It did make the vendor community very nervous,” Silver said.
Restructuring could stop far short of bankruptcy, said Tom Onder, chair of the shopping center and retail development group and a partner at Princeton-based law firm Stark & Stark. “It could mean that Toys says ‘We’re just going to close some stores and try and figure out what our new footprint is, and what our website look is going to be,’” he said.
Because Toys “R” Us owns a large percentage of its stores, bankruptcy isn’t as much of a quick fix option to shed store leases as it has been for other retailers. Many investors have long claimed that the company’s greatest value lies in the real estate it owns, similar to how Sears has stayed alive by selling off its real estate.
The threat of a bankruptcy filing could also be a strategy on the company’s part to convince bondholders or landlords to negotiate. “If the landlord is worried about bankruptcy, they might be more willing to cut a deal,” Gavin said, rather than face a bankruptcy court fight.
The first real wake up call that made Toys “R” Us executives realize the toy times were changing and that they no longer were king of the playground came in 1998, the year Walmart first surpassed it in toy sales.
Since then, six CEOs and two interim CEOs presented their plans for transforming Toys “R” Us stores.
In the 1990s, Bob Nakasone, first as president and then CEO, presided over “Concept 2000” stores, designed to be easier to shop and more upscale. By 1999, Nakasone was out and Concept 2000 had been abandoned.
Jerry Storch was recruited from a top job at Target in 2006 to lead a quick turnaround, but his management style and the worst retail recession since the Depression got in his way.
The latest CEO, Brandon, is a turnaround whiz hired in 2015 who had been a moneymaker for private equity firms at Domino’s Pizza and other companies. He has been given the mission of boosting Toys “R” Us to the point where the three investor owners can benefit, either through a stock offering, sale, or other “exit event.”
Besides focusing on the websites for Toys “R” Us and Babies “R” Us, Brandon’s plan for transforming the company is very similar to those of his predecessors– make the stores a fun place to shop.
His efforts has been slow to show results thus far. In the first quarter of this year, the company had a net loss of $164 million. Net sales in fiscal 2016 were down $262 million, to $11.5 billion and the net loss for the year was $36 million.
Industry supporters point out that a company that sells over $11 billion worth of toys and baby products annually still has a lot of life in it. Critics, however, note that it has lost close to $2 billion in sales since the 1990s.
Toys “R” Us is banking on its brand name – one of the best known in this country and around the world – and on the love that many former “Toys “R” Us” kids have for the brand.
Gleit, the bankruptcy attorney, has fond memories of his parents taking him to the local Toys “R” Us to buy the latest $3 G.I. Joe action figure, back when a trip to Toys “R” Us was a treat kids begged for.
But, said Gleit, putting the nostalgia aside and focusing on the retail realities, ”That’s just not how the world works any more.”