Toys “R” Us files for bankruptcy as holiday season approaches

Photo via MGN

NEW YORK (CBS NEWS) Toys “R” Us — once a dominant player in the American toy market — filed for bankruptcy protection Monday night with a crushing debt load that had turned the 1,600-store chain into an also-ran against larger rivals such as Amazon.com, Walmart and Target.

The retailer filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in Richmond, Virginia, saying in a statement it “intends to use these court-supervised proceedings to restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth.”

That could be a tall order. Toys “R” Us had more than $5 billion in long-term debt as of last April, and more than half of that sum is due for repayment over the next 12 months. “No matter how well you are doing, that’s an awfully big load to carry,” CBS News Business Analyst Jill Schlesinger told CBS This Morning.

With the busy holiday shopping season right around the corner, the company said it would keep its stores worldwide open and work with suppliers and sell merchandise.

The company said the proceedings are a way for Toys “R” Us to work with its creditors on restructuring its debt.

Filing for bankruptcy protection “will provide us with greater financial flexibility to invest in our business … and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide,” Chairman and CEO Dave Brandon said in the announcement.

The move comes at a critical time leading into the holiday season that is crucial to retailers’ bottom lines. The company said it was “well stocked as we prepare for the holiday season and are excited about all of our upcoming in-store events.”

Toys “R” Us said Monday the company’s “approximately 1,600 Toys ‘R’ Us and Babies ‘R’ Us stores around the world — the vast majority of which are profitable — are continuing to operate as usual.”

Many of Toys “R” Us’ current woes can be traced to the $6.6 billion sale of the company in 2005 to a group of investors including private equity giants KKR and Bain Capital and Vornado Realty Trust, according to Davidowitz, adding that other retail chains have experienced the same problem.

“What Toys ‘R’ Us has been doing is extending the debt as it comes due and paying higher interest rates,” Howard Davidowitz, the head of the retail consultancy and investment bank Davidowitz & Associates, told CBS MoneyWatch earlier this month. Such a strategy isn’t sustainable, he added. “They have got enormous debt.”

As a result of the billions in debt, Toys “R” Us wasn’t able to make the investments it needed to compete with its rivals in areas such as online sales, Davidowitz said. The retailer has struggled to boost web sales since then.

After a disastrous 1999 holiday season where many consumers didn’t get their gifts until after Christmas, Toys “R” Us formed a joint venture the following year with Amazon to supply the e-commerce giant with some toy products. Toys “R” Us filed suit in 2004, alleging that Amazon failed to live up to its end of the bargain. Amazon and Toys “R” Us settled the case in 2009.

Toys “R” Us has spent about $100 million over the past few years to improve its e-commerce business. Chief Executive David Brandon told analysts last June that the company’s Babies “R” Us baby-products business was hurt by problems with an online registry tool and the lack of a subscription feature that would enable parents to receive regular shipments of diapers and other baby goods.

What the future holds for Toys “R” Us isn’t clear. As Davidowitz noted, the retailer still has a valuable brand that might interest a buyer, although he wasn’t sure who would buy it.

As credit rating agency Moody’s put it in a report last June: “We believe Toys ‘R’ Us remains a compelling competitive force in the toy and baby sub-segment of retail, however it is also our view that Toys’ competitive position continues to suffer challenges as a result of many of its larger, better-capitalized competitors such as Walmart, Target and Amazon using toys as traffic-drivers to both brick-and-mortar locations and websites, especially during the key holiday season, which seems to begin earlier every year.”