Houston, Texas, USA : Toys R Us and Babies R Us investors have decided to pull out of their bankruptcy auction. They were quoted as saying that they “intend to revive the business behind the Toys ‘R’ Us and Babies ‘R’ Us brand names.” They are also intending to “create new, domestic, retail operating businesses.”
The auction for the Toys R Us brand and rights has been cancelled, according to court documents.
The controlling interests, including hedge funds and asset managers, that would have gained from selling the assets will instead consider trying to revive both the Toys R Us and Babies R Us brands.
The auction was for everything not already liquidated amid the bankruptcy, including the Toys R Us and Babies R Us brand names, its websites, and the Geoffrey the Giraffe mascot.
Now, the new plan is to consider creating “a new, operating Toys R Us and Babies R Us branding company that maintains existing global license agreements and can invest in and create new, domestic, retail operating businesses,” according to the court documents.
The controlling interests, which include Solus Alternative Asset Management, arrived at this decision after receiving some bids for the retailer’s intellectual property. It found, however, that a plan to revive the retailer would actually be better suited to their interests rather than an immediate sale.
Toys R Us, which was the only nationwide specialty retailer for toys, left a hole in the market after it liquidated all of its US operations earlier this year. It’s a hole that that its competitors are trying desperately to fill, as Toys R Us did about $11 billion in sales its last full year of business.
Toys R Us was once king of the toy castle. In the 1990s, it was the biggest toy seller in the US, expanding rapidly as it pushed out smaller chains. But by 1998, things had changed, and Walmart began selling more toys than Toys R Us in the US — a signal of more trouble ahead.
Toys R Us then launched a turnaround plan that ended with the chain seeking buyers. Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust together invested $1.3 billion in a $6.6 billion leveraged buyout in 2005, taking Toys R Us private. The company had essentially been purchased using its equity, with the help of the private-equity cash.
This saddled Toys R Us with an astronomical amount of debt — over $5 billion worth — that the company hadn’t shaken even a decade later. According to the filing with the bankruptcy court, Toys R Us was still making $400 million payments on its debt each year.
In Toys’ case, high leverage remaining from the 2005 leveraged buyout reduced financial flexibility, which in turn limited investment, leading to the erosion of the company’s competitive position at a time when its primary competitors such as Walmart, Amazon, and Target were running on all cylinders.
These high payments prevented the chain from making the changes necessary to compete, like improving the in-store experience and beefing up e-commerce in the age of Amazon, the company said in the filing. The debt also prevented the chain from keeping up the appearance of its stores and ensuring its employees were well-paid.
The retail landscape was shifting underneath Toys R Us’ feet, and the combination of increased competition and lack of maneuverability helped lead to its current situation.
In the liquidation filing, Toys R Us blamed its poor holiday performance on Walmart, Target, and Amazon pricing their toys low enough that it couldn’t compete and make a profit.
Toys “R” Us filed for bankruptcy a year ago, with the plans to use the reorganization process to shed debt and remain in business. But after a disastrously bad Christmas shopping season the company announced in March that it would close its remaining 800 US stores and go out of business.
That cost about 31,000 workers their jobs. The 70-year old retailer shut down in June.