Toys”R”Us, the once great retailer is getting ready to liquidate it’s already bankrupt U.S. operations. Here’s a quick look into the peculiar story of how they got here.
As a New Yorker I’ve never cared much for Times Square. The world famous tourist destination known as the “crossroads of the world” (assumingly because that’s where Broadway and 7th Ave intersect) has always seemed a little forced. That being said there was one place that did seem to capture the magic the world had been pining for, Toys”R”Us. You’d walk into the (four?) story toy shop via a massive, seemingly eternally spinning revolving door, and the first thing you’d see was a ferris wheel!
Bear with me as I put together their floor plan through a mixture of memories and nostalgia. If I remember correctly they had a lower level giving the indoor ferris wheel five stories to play with. I know there are much larger ferris wheels and even indoor roller coasters, but that’s not the point. I dare you to try and convince even the most vapid company (ahem, Juicero) to put a ferris wheel on some of the most expensive commercial real estate on the planet.
But Toys”R”Us did and it was great. They still understood at that point that they were in the business of selling experiences. Parents would bring their children and they would immediately be struck with sensory overload. An overwhelming conviction of “Where do I start?”. That’s the point of the ferris wheel. No child has ever said they REALLY want to go to Orlando, they want to go to Disney World, they want to go to Universal Studios. They want to go to the ferris wheel in Manhattan. That one with the toys and helicopters, candy and barbies. The moment they gave up being a destination they gave up their identity. Parents could learn just as much about what gifts to get their children from looking at their Amazon shopping cart as opposed to a trip to a store.
Unlike most postmortems the downfall of Toys”R”Us can be traced back to a $7.5 billion leveraged buyout by KKR, Bain Capital, and Vornado Realty Trust on July 21st, 2005. The company was immediately delisted from the NYSE and was saddled with over $5 billion of debt. This was nothing short of financial malpractice.
Where most retailers declare bankruptcy primarily due to decline in sales Toys”R”Us is different. The retailer posted $11.1 billion in sales in the 12 months ending in October 2017 (the same month they initially declared bankruptcy) a less than 1% decline from the 11.2 billion they posted in the 12 months leading up to their LBO.
While it’s not stellar, stagnant sales combined with reductions in overhead, such as the closing of their Times Square location, would normally point towards improved margins and through that increased net revenue. Unfortunately that doesn’t take into account their debt. For much of the last decade their interest payments have either closely matched or outpaced their operating income.
Additionally Toys”R”Us has been unable to pay down any of its debt for the last seven years. As mentioned by Tara Lachapelle in this Bloomberg Businessweek article “by 2007 the retailer’s interest expense spiked to 97 percent of its operating profit”. Before the buyout their 2005 debt was a reasonable $105 million. Had they not been forced relinquish their entire operation profit (about $450 million) every year they could have used a portion of that revenue to invest in a restructuring that could have been focused on their future.
It’s not unreasonable to believe the giants of the toy industry would have been open to a restructuring. The company makes up 15% of U.S. toy revenue and the loss of its over 800 stores (this includes the Babies”R”Us brand) will be a severe blow to toy manufacturers. Mattel and Hasbro in particular will have a difficult time with this potentially being the push they need to move forward on a merger.
The allure of Toys”R”Us was its ability to supersede the brands on it’s shelves. You could buy some Legos, a box of K’nex’s, and something from Mattel, but that wasn’t the point. It was about the act of discovery. People, especially kids are hardwired to explore and ask questions. Somewhere along the way and bogged down by a mountain of debt Toys”R”Us forgot why it existed. The end goal undoubtedly was to make a sale but the path to that sale was paved with self discovery and exploration. I’m sure they’ll be missed.