Corporate Finance

Toys R Us Liquidation Dashes ‘New Era’ Hopes

The bankrupt retailer says it will shut down all its U.S. stores after a disastrous holiday season thwarted its turnaround effort.
Matthew HellerMarch 15, 2018

A disastrous holiday season appears to have ended any hopes of a “new era” for bankrupt Toys R Us, with the retailer announcing Thursday it was planning to close all 735 of its stores in the U.S.

After years of slumping sales, Toys R Us filed Chapter 11 in September to relieve a $5 billion debt burden. It said it would use $3 billion in bankruptcy financing to revamp its stores.

“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 at the time.

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But on Thursday, Brandon sounded a different tune as Toys R Us asked the bankruptcy court for permission to “begin an immediate and orderly liquidation” of its U.S. stores.

“We no longer have the financial support to continue the company’s U.S. operations,” he said in a news release, adding, “This is a profoundly sad day for us as well as the millions of kids and families who we have served for the past 70 years.”

In court papers, Toys R Us said the “many obstacles facing [the company] proved insurmountable” after holiday sales came in well below worst case projections, with EBITDA more than $260 million below the year-ago period.

The fiscal 2017 earnings shortfall, it said, “also triggered a series of reactions and covenant defaults that frustrated prospects for reorganizing the U.S. business as a going-concern” and the company was projected to run out of cash in the U.S. in May.

“In the face of these extraordinary circumstances …. [Toys R Us’ principal creditors] have determined that the best way to maximize their recoveries is to liquidate the existing inventory in all of the debtors’ 735 remaining U.S. stores and begin an orderly wind-down of the U.S. operation,” the court papers stated.

Toys R Us offered one possible alternative scenario, saying it had developed “a potentially value-maximizing transaction” that would combine up to 200 of the top-performing U.S. stores with its Canadian operation.