While Toys “R” Us was acquired by KKR, Bain Capital Partners and real estate investment trust Vornado Realty Trust in a three-part the takeover in 2005, there are rumours the company is on the verge of filing for bankruptcy. What a turnaround from the 2005 deal which was pegged at $6.6 billion and saw one of the world’s most prestigious toy retailers taken off the stock market. The company still has an array of bonds trading today although amid rumours of the potential filing for bankruptcy bond prices have collapsed.
Is this the end for Toys “R” Us?
While the headlines may suggest the company is on the verge of disappearing from high streets and the Internet, this is not the case. There is a debt problem, the company is struggling to service its debts and with the redemption of $400 million of bonds due in 2018, owners of the company have decided to act sooner rather than later. It is not definite that the company will file for bankruptcy but those close to the issue believe it is one of many options.
We only need to look at the bankruptcy of Macy’s in years gone by and the fact that the company was able to trade on through those difficult times. It is also worth noting that we are approaching the holiday period which is historically prime trading time for companies such as Toys “R” Us. It is also worth appreciating that Toys “R” Us makes up 11%, 9% and 15% respectively of worldwide sales for Mattel, Hasbro and Jakks Pacific. When you also consider the fact that Toys “R” Us does not mark down the price of products for sale as much as its competitors we cannot see the above toy manufacturers cutting the company adrift.
The changing environment
In some ways Toys “R” Us has been slow to react to the changing trading environment with online purchasers more prevalent than ever before. The company has a name 2nd to none, a reputation for quality as well as excellent customer services. There is certainly going to be some pain in the short to medium term but many believe that the company will emerge from bankruptcy, if this is the chosen journey, a much stronger and a much more focused company.
It will be interesting to see how the company’s relationship with toy manufacturers develops in years to come because to combat the threat of the Internet, Toys “R” Us will need to consider price reductions along the lines of those by competitors such as Target. At the end of the day online customers are much more savvy these days, especially when it comes to getting the best products at the lowest prices.
Conclusion
It would be amazing to see a company with the reputation of Toys “R” Us filing for bankruptcy even if this is something of a long-term solution to a short-term debt problem. It is highly unlikely the company will disappear from the high street and the Internet but a painful bankruptcy filing, if the company does go this way, will lead to major changes in ways the company operates and its price discounting policy. It will need to compete with other online operators and this will ultimately see promotions and price reductions becoming more commonplace in Toys “R” Us and in the company’s online store.