Toys 'R' Us balks under debt, files bankruptcy
Retail chains are already reeling from Amazon's aggressive pricing. Now, in yet another blow to this brick-and-mortar industry, Toys "R" Us Inc., once a category killer, has filed for bankruptcy. The offline behemoth has failed to stand its ground after a buyout, made more than a decade ago, saddled the retailer with insurmountable debt. Here's more about it.
What's the plan?
Filing for bankruptcy gives Toys "R" Us the leeway to restructure its $400 million debt that is due next year. The offline giant will then have the option of rebuilding itself as a leaner organization. Right now the firm is in a bad shape. Its vendors have been stalling shipments, as they feel that the retailer won't be able to pay for them.
Why was it needed?
According to analysts, the Chapter 11 reorganization of America's largest toy chain was a long time coming. The firm has been riddled with financial problems for quite some time and "finally, the straw broke the camel's back," said Jim Silver, an industry analyst, to Bloomberg. Needless to say, shares of Toys "R" Us' vendors, like Mattel Inc., Hasbro, will tumble further with this news.
Not shutting shop
Toys "R" Us will be operating its stores while going through a bankruptcy, it said in its filing. The firm listed its debts and assets of more than $1 billion each in the filing. Toys "R" Us recently received $3 billion in financing from lenders and some of its existing lenders will continue to fund its operations, subject to court approval.
The debt problem
The debt burden is choking the firm, said analysts. Bloomberg Intelligence analyst Noel Hebert informed that the company had to shell out around half a billion dollars annually on cash interest expenses, leaving less capital for the firm to work on. Therefore, the firm's merchandising, expansions, and, more importantly, online presence suffered. This Chapter 11 should make sure that they get a fighting chance.
It will be profitable again
If the firm finally manages to get its debt under control, it might work its way through profitability. According to the editor of toy-review site TTPM.com, Jim Silver, the firm's earnings before interest, taxes, depreciation, and amortization was good. "If they didn't have the debt, they would be making $500 to $600 million a year in profit," he said.
