Toys 'R' Us liquidation: Analysts weigh in

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Toys 'R' Us liquidation: Analysts weigh in

By CSA Staff - 03/15/2018
“While the news is a gut check to legacy retailers that are struggling to adapt to modern retail realities, this is not a development that comes as a surprise. In an age where shopping for toys is more efficient online or at Walmart, a big-box toy retailer with next to nothing in terms of service or experience doesn’t make a lot of sense.

Had Toys “R” Us embraced e-commerce earlier instead of outsourcing it to Amazon from 2000-2010, things might have gone differently. And had the chain made a bold move to reimagine stores, perhaps by adding in daycare centers, things might have improved. But Toys “R” Us did none of these things. Spread thin across too many countries, with too many stores and too much debt, it boxed itself into its current fate.

One interesting wrinkle to consider will be the impact on the rest of the market. Amazon, Walmart, and Target are clear winners, possibly along with friendly local toy and game stores, but that is fairly obvious. In the next year, it will be interesting to see if the release of Toys “R” Us’ inventory into the market depresses toy sales for other retailers. This is likely good timing for them due to the distance from Christmas, but the demand for off-price items and discounts is pervasive, and it’s this sort of mass disbursement that third party online sellers will take advantage of, much to the chagrin of larger retailers that try to abide by a MAP.” -- Tim Barrett, senior retailing analyst, Euromonitor International

 




The liquidation of Toys “R” Us is the unfortunate but inevitable conclusion of a retailer that lost its way and forgot core retail competencies.

Even during recent store closeouts, Toys “R” Us failed to create any sense of excitement. Moreover, its so-called heavy discounts remained well above the standard prices of many rivals like Amazon and Walmart. Arguably, if Toys “R” Us can't successfully execute a closeout and stimulate interest, then it has little to no chance of trading under normalized conditions.

The chain may well blame suppliers and competitors for its demise, but the primary responsibility lies with poor management decisions. As the competitive dynamics of the toy market intensified, management failed to respond and evolve. As such, the brand lost relevance, customers and ultimately sales.

Admittedly, the leveraged buyout which burdened the company with debt reduced the room for maneuver and left Toys “R” Us vulnerable. Questions should be asked as to the wisdom of this particular financial transaction which weakened the sustainability of the company.

The main tragedy of liquidation will be the extensive loss of jobs. In our view, those on the shop-floor have been badly let down by management and those doing financial deals. -- Neil Saunders, managing director, GlobalData Retail

 




Toys “R” Us is a sad story, particularly for boomers like us who brought their kids to the chain so often in its halycon days. As one of the very first superstore category-killers, TRU had a great run for almost a quarter-century before falling on hard times -- and under a crushing debt load, courtesy of private equity.

The problem for TRU -- and for many other category big box retailers, is that the era of the superstores has come -- and gone. Even the survivors such as Best Buy are shrinking or repurposing their retail square feet.

In addition, TRU suffered from several key company specific issues, which is why it has lost market share ever since Walmart displaced it as the largest toy retailer 20 years ago:

1. Its retail square footage capacity was sized to meet peak holiday demand in Nov-Dec, while competitors such as Walmart and Target could accordion up toy floor space during the season, and then back down post-Christmas, resulting in TRU's excessive occupancy costs

2. As a store-centric retailer, it was late to the e-commerce dance -- and in fact outsourced its online operations to Amazon for many years, which is now one of its top two competitors

3. It suffered from insufficient penetration of unique own-brand or exclusive product and, relatedly, overdependence on commodity toys -- all subject to race-to-the-bottom pricing.

4. It also suffered from excessive debt service requirements. -- Craig Johnson, president, Customer Growth Partners

 




“The Toys ‘R’ Us management team was seen as overly optimistic and out of touch when it filed for Chapter 11 in September. At the time, it said it would close no stores and emerge stronger than before, implying that the only problem was the balance sheet, but Toys had much deeper problems. The combination of its weak Internet presence, growing competition in the space and the large number of underperforming stores made this bankruptcy quite predictable.

Creditors in retail cases have gotten comfortable with liquidations. Inventory can often be sold for at or near cost, and while many of Toys' stores have not been profitable, it has many good locations. Those leases or owned stores can be sold off. In short, liquidation is not necessarily a bad thing, especially for the secured creditors. And liquidation substantially reduces the bankruptcy expenses.” -- Stephen Selbst, chair of the restructuring & bankruptcy group at Herrick, Feinstein, LLP

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