Toys R Us Files Bankruptcy With $5B in Debt

The retailer calls its filing the "dawn of a new era" but admits the timing "could not have been worse" with the holiday season looming.
Matthew HellerSeptember 19, 2017

Toys R Us has filed for bankruptcy protection, succumbing to a massive debt burden and falling sales amid competition from Walmart and Amazon.

The retailer took on more than $5 billion in debt to finance its $6.6 billion leveraged buyout in 2005 by an investor group led by KKR, Bain Capital, and Vornado Realty Trust. It was facing $440 million of debt maturities in 2018 followed by $2.6 billion in 2019.

The company’s woes have also been compounded by its competitors, with Walmart offering the lowest prices in the toy category and Amazon offering a far broader selection of products.

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Foreshadowing the Chapter 11 petition filed late Monday, Toys had recently hired the law firm Kirkland & Ellis to advise on a restructuring, with bankruptcy one possible outcome.

“Today marks the dawn of a new era at Toys R Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” CEO Dave Brandon said in a news release, adding that the company would work with its creditors to restructure the $5 billion of long-term debt on its balance sheet.

Toys said the “vast majority” of its approximately 1,600 Toys R Us and Babies R Us stores are profitable and will continue operating. JPMorgan Chase and other lenders have provided a cash infusion of more than $3 billion to help sustain operations during the bankruptcy process.

Toys’ disappointing 2016 holiday season carried over into the spring as it reported a net loss of $164 million in the fiscal first quarter of 2017, up from $126 million a year earlier. Same-store sales have fallen for three straight quarters.

In a court filing, Brandon admitted that the timing of the bankruptcy filing “could not have been worse, as the company is in the process of building holiday inventory.” The fourth quarter accounts for about 40% of Toys’ revenue.

“If the bankruptcy restructuring can help Toys R Us get a handle on its debt, it’s not crazy to see a profit in sight,” Recode said. “But the chances of dominance in the toy category are over.”