Is Toys ‘R’ Us nearing the point of no return?
When Toys “R” Us filed for Chapter 11 bankruptcy protection last September, the company made the point that “the vast majority” of its locations were profitable and that it expected to keep most of its 1,600 stores (800 in the U.S.) open. Five months later, the chain has announced plans to close another 200 stores, effectively cutting in half the number of stores it operates in the U.S.
According to The Wall Street Journal, internal company documents also show that Toys “R” Us appears to be backing off from a promise to provide severance to workers affected by store closures. Store managers were told last month to let all workers know that the company would pay severance, while the documents reviewed by the Journal said, “There are no severance benefits being provided for the store-closing process.”
A spokesperson for the chain told the Journal that some employees at stores being closed may be eligible for bonuses connected to the performance of liquidation sales.
When Toys “R” Us filed for bankruptcy last year, it faced the task of managing a debt load of about $5 billion. At the time, the company announced that it had received a commitment of over $3 billion in debtor-in-possession financing that it intended to use to improve liquidity while maintaining operations. CEO Dave Brandon said Toys “R” Us would restructure its long-term debt as it entered “the dawn of a new era” ahead of the 2017 Christmas selling season.
As it turned out, Toys “R” Us’s Christmas was worse than the chain had expected, putting the retailer in danger of defaulting on its debtor-in-possession loan, according to a CNBC report. If the retailer fails to live up to the terms of the deal, lenders will have the option of forcing Toys “R” Us to pay them back immediately, which could potentially push the business to the point of no return.
- Toys “R” Us Plans to Close Another 200 Stores – The Wall Street Journal
- Toys R Us is in danger of breaching a covenant with its lenders – CNBC
- Toys ‘R’ Us files for bankruptcy, enters ‘new era’ – RetailWire
DISCUSSION QUESTIONS: Do you still see a viable path forward for Toys “R” Us? What advice would you have for management at this point? Do you expect the chain to lose employees in light of the report that it does not plan to offer severance packages to those affected by store closings?