Toys "R" Us Files Chapter 11
Toys “R” Us became another in a long line of companies succumbing to one illness or another by filing reorganization and protection under Chapter 11 of the bankruptcy code late last week.
The toy retailer, which started back in 1948 with a single Washington D.C. store issued a statement by CEO David Brandon which summed up the move: “Today marks the dawn of a new era at Toys “R” Us where we expect financial constraints that have held us back will be addressed in a lasting and effective way”.
The statement illustrates both the positive and negatives in typical CEO fashion, politely indicating the company will continue on by somehow not meeting its financial obligations as originally promised. After all, that’s what chapter 11 is: renegotiating a company‘s debt while reneging on its original promises.
The company owes about 5 billion and said all of its 1600 stores would remain open going into the lucrative time of year, the holiday season, where toys under the tree boost most retailer’s balance sheets, especially the toy and gaming businesses.
The bankruptcy could indicate the rapidly changing retail landscape brought about by online competition. It wasn’t so long ago when Toys “R” Us bought out competitors FAO Schwartz and KB Toys, only to succumb to its debt load which obviously increased by such acquisitions.
Commentary from Forbes and new965.com indicate the obvious: pressure from online retails are causing tsunamis in traditional retail company balance sheets as consumers elect to buy from the comfort of their home instead of taking an arduous trip to the mall.
Other companies who have suffered similar fates include shoe store Payless and Gymboree, the children’s clothing outlet.
Highlighted in previous Money Matters articles entitled “Online Retail Wipe Out”
11/2017, “Another Retail Wipe Out” 12/2017 and Money Matters Show #138 entitled Retail Wipe Out, 2/2012, the pressure from other methods of shopping becoming available with the advent of the internet is becoming prevalent and mainstream. Toys “R” Us said as much in a comment at the time of filing which said it had to improve its online services and enhance the store experience (new965) which is a fancy way of saying they have to get better in the online market place while adding more value and therefore a reason for shoppers to get out of their chairs and drive to a store.
Meanwhile online goliath Amazon continues to cause havoc in the retail environment by making the shopping environment of a comfy chair at home with credit card in hand in front of a computer more desirable and less hassle then getting into a car only to spend hours parking, fighting crowds, and struggling with shopping bags. Added features such as free shipping programs and hassle free returns make a strong case for the staying home with a cup of coffee and comparing hundreds of prices in microseconds. Online reviews further enhance the experience.
Although Toys “R” Us will survive for now, the reverberations from its reorganization could cause additional damage to related sectors as 5 billion in debts are restructured. No doubt Toys “R” Us won’t be last retailer to hoist the white flag and cry uncle under the weight of a rapidly changing environment caused by a shift in shopping methodology brought on by an expanding internet.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge are not affiliated. His website is www.moneymanagementradio.com. California Insurance License # OL34249