What Does Toys R Us’ Bankruptcy Mean?

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Published by Taylor Financial Group

Money problems for Toys R Us go back far longer than last week, when they filed for Chapter 11 bankruptcy.  In fact, there were indications that the well-known toy retailer was in trouble as far back as 12 years ago, when three private firms took ownership of the company to try to save it from its financial woes.  Vornado Realty Trust (VNO), KKR & Co. (KKR), and Bain Capital jointly purchased Toys R Us in 2005, with hopes that the strength of the retailer’s name, together with the firms’ investors, would help get the toy retailer back on its feet.  Clearly, it didn’t work.  But, what does this bankruptcy really mean?

The Debt Was Too Much

Despite their best efforts, Toys R Us was unable to dig out of its $5 billion in debt.  But that doesn’t mean they’re gone for good.  Their plan is to use the bankruptcy to help them restructure their debt.  In fact, they have already allegedly secured a $3 billion debtor-in possession loan that will keep them operating.  However, the bankruptcy will all but wipe out their owners’ $1.4 billion of equity.  Essentially, the huge debt burden coupled with the changing competitive landscape proved too much to handle.

 

It’s Death by Amazon All Over Again

Though Toys R Us is still in the game, other big retailers like Amazon, Target and Wal-Mart are likely to get more business as a result of this bankruptcy.  For starters, toymakers are looking for the quickest ways to get their products sold.  Amazon, especially, has grown in popularity when it comes to purchasing anything, including toys – mainly because of their almost-unbelievable delivery speeds through Amazon Prime.  Consumers are becoming more and more accustomed to ordering online and taking delivery in two days – sometimes, even in one day.  It’s hard for traditional retailers to compete with that.  With the holidays approaching, consumers are going to be looking for convenience and efficiency.  And vendors already know Toys R Us is not the one to go to – at least not right now.

Truth be told, in a few weeks, the Toys R Us bankruptcy will be old news and no one will even care.  However, this is another cautionary tale of the disruptive force of technology coupled with the need to maintain nimbleness (and low debt) in order to survive in a rapidly changing business climate.  Let’s just hope that Toys R Us is able to dig themselves out of the hole they’re in – because we can’t imagine life without Geoffey, the big orange giraffe.

 

Clearly, Toys R Us did not have a good financial plan in place.  Don’t let the same thing happen to you!  If you have any questions about your financial plan or you want to review if you’re still on track toward pursuing your goals, give us a call today to schedule an appointment.

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