Toys R Us Inc., the iconic U.S. toy retailer, announced that it may have to liquidate its operations if it cannot negotiate a deal with creditors to pull it out of bankruptcy.
The company’s struggles reflect a growing problem in the toy industry as demand for traditional toys declines. The closure of Toys R Us will be detrimental to many toy companies with ties to it.
The liquidation will most likely result in the closing of all 800 Toys R Us stores in the United States. The announcement of what will happen to the company could come as soon as Thursday, when Toys R Us is scheduled for its bankruptcy hearing.
According to CNBC, purchases at Toys R Us accounted for 15 to 20 percent of U.S. toy sales in 2017. Furthermore, it is estimated that as much as 15 percent of all toy sales could be lost for good upon the retailer closing.
The toy industry has been in trouble lately and the closure of Toys R Us will hurt many toy companies, including Hasbro and Mattel. The two companies’ stocks plummeted when the news about Toys R Us came out.
On the day of the announcement, Hasbro’s shares sank as much as 10 percent, while Hasbro Inc. fell 3.8 percent. According to recent regulatory filings from these two companies, Toys R Us accounted for nearly 10 percent of the companies’ overall sales.
Toys R Us is the only megastore still dedicated to toys, though it is not the highest seller of toys in the country.
Without the retailer, toymakers will struggle to promote their less popular items. Additionally, the retailer has served as an important proving ground for new toys such that toy companies will now have to find new ways of testing their products.
Toys R Us is where up-and-coming products are discovered. Toys R Us also takes chances on new items and smaller suppliers, which is something that big-retailers like Walmart Inc. and Target Corp. do not do.
Since many toy purchases are a result of in-store browsing and impulse purchasing, many toy companies will miss out on these sales with the closure of Toys R Us stores. The retailer is also relied on for premium pricing. Toys R Us filed for bankruptcy in September with $4.9 billion in debt, a result of its $6.6 billion acquisition in 2005 by KKR & Co. L.P., Bain Capital and Vornado Realty Trust. In recent years, Toys R Us Inc. has missed payments to some of its suppliers due to a lack of funds. The company is struggling to find a buyer or to reach a deal with lenders to restructure its debt, which has left it with few options.
The collapse of the toy giant is in large part due to its prices being undercut by retailers such as Walmart Inc. and Target Corp., as well as the changes in the scope of retail with the rise of Amazon.
The fall in the demand for toys also added to this burden, partially due to the increased popularity of technology with children including video games and high-tech toys. Others attribute the demise of the toy industry to the over-reliance on products based on movie and television characters, which many consumers find overdone.
However, despite its struggles, Toys R Us shows that a demand for toys still remains, considering that the company generates more than $7 billion in annual sales in the United States.
The company tried to make a comeback after their bankruptcy filing in September 2017 by attempting to build a stronger internet business and create more experiential stores where children can try out new toys in a sanction area, but their efforts were in vain.
The retailer missed all of its financial estimates for the past holiday season, which is the most crucial time of year for the toy industry.
If Toys R Us stores close, they will have clearance sales, which will painfully impact the toy industry in the short-term by slowing already sluggish sales for their competitors. It is also assumed that a considerable amount of money is tied up in gift cards that have not yet been cashed in. Bankruptcy experts are encouraging consumers to use their outstanding gift cards as soon as possible as they will become worthless should Toys R Us stores close down.