Christmas is coming, but North America's biggest toy store chain has just filed for bankruptcy protection.
Toys "R" Us said on Monday that they are "voluntarily seeking relief" through the US Bankruptcy court and that their Canadian subsidiary would be seeking similar protection via an Ontario court shortly. They hope that court-supervised proceedings will help them restructure the outstanding debt plan long-term growth. Despite this news heading into the Christmas shopping season, Toys "R" Us said that stores will remain open and that it will continue to work with suppliers and sell merchandise.
So that's good news for parents... for the meantime, it seems, Toys "R" Us is still open for business for those who are looking to go Christmas shopping there. But the future appears shaky, and no one can be quite sure what will happen as the company tries to slim down. Will our nearest stores close down? Will returns in the new year be rejected?
And what happened to Toys "R" Us? Why are they so in debt?
It's no lie that Amazon.com Inc. has been nipping at the heels of big box retailers for several years. Our childrens' gradual switch to iPads and electronic toys may also shoulder some of the blame. But unfortunately, Toys "R" Us' debt problem is much older than these recent developments - in 2005, Toys "R" Us was "loaded up with debt" according to Bloomberg (to the tune of about $7.5b) by Bain Capital, KKR & Co, and Vornao Realty Trust to turn it into a private corporation. Whlie struggling to pay as much as a half a billion dollars on cash interest expenses, Toys "R" Us was left crippled and unable to put more funds towards expansion, merchandising and online presence - which was an opportunity Amazon.com wouldn't fail to take advantage of.
On top of dealing with the debt, price wars and price increases on credit default swaps has hindered Toys "R" Us' ability to turn a decent profit, which means the debt doesn't get paid.
Toys "R" Us' vendors have taken a hit as well; Mattel Inc. and Hasbro took hits to their stock price following the announcement on Monday.
We'll wait to see if yet another one of our beloved retail chains is going to pull through or bite the dust.