Wednesday, September 20, 2017

[REPORT] Toys "R" Us May Soon Become Toys Were Us

Wayne, New Jersey-based Toys "R" Us filed for Chapter 11 bankruptcy late this past Monday night.  The retailer, which has been hit hard by both Amazon.com and Walmart, hopes to restructure about $5 billion in long term debt so that it can continue as a going concern. 
Amazingly, back in 2000, Amazon and Toys "R" Us -- today enemies in a fierce retail/e-commerce battle -- were, at least briefly, allies.  Amazon, then a six-year old dot com "startup," partnered with Toys "R" Us, then a fifty-two year old toy powerhouse.  Toys "R" Us was struggling with e-commerce fulfillment and Amazon was thriving as an online source for books and other media.    

On August 10, 2000, Jeff Bezos, Amazon's founder and CEO, told CNNfn [a now defunct financial news division of CNN] that the union between the companies is "a long-term contractual alliance" that could be a model for future alliances.  

While the union of the two companies didn't last, it did last longer than two Britney Spears' marriage, one Kim Kardashian marriage, a Sophia Bush marriage, a Drew Barrymore marriage,  a RenĂ©e Zellweger, a Lisa Marie Presley, a Pamela Anderson, a Carmen Electra and an Elizabeth Moss combined.  

In 2004, Toys "R" Us sued Amazon alleging breach of contract.  In their suit, Toys "R" Us alleged that Amazon was not honoring the 10-year exclusive contract with Toysrus.com. "Under the deal, any time a consumer searches for a toy, game or baby product on Amazon.com, the search will be automatically redirected to the product on Toysrus.com's Web site."  Toys "R" Us alleged that Amazon was permitting third parties to sell products that should only be sold by Toys "R" Us. Amazon said at the time that the lawsuit would "fail," but later counter-sued, citing a “chronic failure” by Toys "R" Us to keep items in stock.

In 2005, Toys "R" Us was taken private by a consortium of three private equity firms: KKR, Bain Capital, and Vornado Realty Trust, for $6.6 billion.

Amazon and Toys "R" Us dissolved their partnership in 2006.  In 2009, Amazon agreed to pay Toys "R" Us $51 million to settle the dispute. 

Today, Toys"R"Us, like many brick and mortar retailers, still depends on the holiday season for a significant portion of their annual sales, so their bankruptcy timing could not be worse.  

The company said it was forced to file for bankruptcy 14 weeks before Christmas because reports of their impending bankruptcy had caused toy vendors to begin to demand cash payments for orders before they would ship merchandise

The company, which operates the Toys "R" Us and Babies "R" Us retail chains, previously operated a third division, Kids "R" Us, but shuttered it in 2003.  In 2009, Toys "R" Us acquired upscale toy retailer FAO Schwarz and after closing the legendary chain's last remaining store on New York's Fifth Avenue in 2015, sold the company last fall to California-based ThreeSixty Group.
Vintage Toys "R" Us store design
In recent years, Toys "R" Us has closed metro locations in Tucker and Buckhead while FAO previously operated stores in Buckhead's Lenox Square and Buford's Mall of Georgia. 

The Tucker area Toys "R" Us at Northlake [Tower] Festival had been vacant since its early 2015 closure, but it is currently occupied by temporary/seasonal retailer Spirit Halloween.  The former Buckhead Toys "R" Us is today occupied by Saks OFF FIFTH and World Market.  The former FAO Schwarz at Lenox Square is today home to both a newly shrunken and re-imagined Abercrombie & Fitch as well as a new The North Face store.  The former FAO at Mall of Georgia was later a Hummer dealership showroom, but is today home to The Cheesecake Factory and Marlow's Tavern

The company said it is “currently performing a detailed review of their real estate portfolio” and is identifying poorly performing stores where the rents are too high, in order to concentrate their resources on their best performing stores.  Toys "R" Us, which was started in 1948, today has about 1,600 stores worldwide. 

In Georgia, the company operates about 20 or so stores between its two brands including locations in Buford near Mall of Georgia, in Alpharetta near North Point Mall, in Lithonia near The Mall at Stonecrest and in Kennesaw near Town Center at Cobb, among others. 

If Toys "R" Us does close stores in Atlanta and/or elsewhere, it would be just the latest blow to an industry that has already lost a number of popular companies.  

K·B Toys, which first opened in 1922, once had 1,300 locations nationwide, primarily in malls, but ceased operations entirely in 2009 with its intellectual property eventually purchased by Toys "R" Us.  

Lionel Corp., makers of Lionel trains, once operated about 200 toy stores under the names Lionel Kiddie City, Lionel Playworld, and Lionel Toy Warehouse.  The stores division, which first launched in the 1960s, was for a time the second largest toy store in the country.  Over-expansion and competition from Toys "R" Us were cited as reasons for the company's demise.  The company closed a number of stores in 1991-1992, including one on Buford Highway in Doraville, but in 1993, it closed all of its remaining stores after being unsuccessful in reorganizing with its creditors following its 1991 chapter 11 bankruptcy filing.  

Online publication Slate recently published an interesting article where the author suggests that Toys "R" Us should have followed Best Buy and "re-engineered its whole business." 
A Toys "R" Us combo store with Babies "R" Us
Yesterday, Forbes published a post titled "How Toys 'R' Us Neglected The Web" where the magazine delves into the mis-steps it feels doomed the retailer. 

Oh yeah, by the way, Amazon stock (NASDAQ: AMZN) shares that on August 10, 2000 closed at just over $30 a share, yesterday, September 19, 2017, ended the day at just under $970 a share, down from its $1,000+ high earlier this summer.  

If you buy toys, where do you buy them?  Do you think Toys "R" Us can turn things around or are they just delaying the inevitable?  If Toys "R" Us does decide to close stores in metro Atlanta, which do you think will be on the chopping block?   

Please share your thoughts below

7 comments:

Anonymous said...

Their business is performing very well so let's not use the bankruptcy label to indicate that the stores are about to go away. Do some stores close as they review their costs and individual store performance? Sure. But this is to restructure the debt they were saddled with. Not because the operating business is a mess.

ImAndy said...

That's not exactly correct. They are restructuring their debt from 2005 when they went private. The reason they did this in 2005 is their operating business was a mess. All of their stores were extremely old and on the "wrong side of town". They went private, saddled up a bunch of debt, closed all the Kids R us stores, and ignored pleas from Wall Street at the time to spin off Babies R Us and decided to soldier on like the internet wasn't happening. They hired some reject from Target as CEO who made even more bad decisions.

In 2017 they've gotten rid of many of the stores on the wrong side of town (but not all) but they are still not profitable and still haven't fixed the issues from 2005. In addition, the crown jewel of 2005 Babies R us has turned out to be a dud too because you don't need a box that big to sell car seats and strollers while everyone buys diapers online.

It really is sad that parents don't make the toy store an experience for their children and shop online, but the original category killer of retail is going to follow all the others slowly to oblivion. They've made a good run.

Anonymous said...

^and that's not entirely correct either. They had GAAP operating income of $460MM, which was up y/o/y. EBITDA was $792MM. However, their annual debt service costs are upwards of $400MM, which is crippling. On a total of $5B in debt, they will never get out from under it.

The business may not be what it used to be but it's still performing well. I do agree that their stores are in a need of a refresh but where will that capital come from?

Anonymous said...

Children want phones and tablets more than tangible toys... sad.

Anonymous said...

Toys R Us has been mis-managed for years. They failed to adapt and make their stores a "destination" for kids. They cannot compete on price and convenience with the internet companies. They did not differentiate their stores by having offerings like having a "party room" in any of the stores I frequented. Parents would perhaps purchase the gifts for a birthday party at.the store and of course as they leave the party their kids would ask for a toy.
I think it is telling in the story, that they focused on cutting costs exclusively rather than increasing store traffic by having parties, lego building events, YuGiOh tournaments etc.
I love ToysR Us, but they need management with more vision and creativity.

Anonymous said...

Anonymous 5:24pm that is a great ideal. Like American Girl. Party room with food. My friends with kids are always looking for new venues to have birthday parties ... Just set up appointment, show up and leave with no cleanup.

Anonymous said...

A Toy R Us customer/parent is no different than the Chuck E Cheese target market. The internet is much more pleasant. No thank you!