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Toys R Us hires law firm as it explores possible bankruptcy filing

  • Toys R Us has hired a law firm to help restructure its roughly $400 million in debt due in 2018.
  • Toys R Us is weighing filing for bankruptcy as one outcome.
  • The potential restructuring comes ahead of the crucial holiday season, when the retailer does the majority of its sales.

Toys R Us has hired a law firm to help restructure its roughly $400 million in debt due in 2018, a move that could include the marquee toy store filing for bankruptcy protection, sources familiar with the situation said Wednesday.

Addressing the retailer's debt load prior to the crucial holiday season could give its major vendors such as Mattel and Hasbro clarity into the company's long-term viability to help ensure the toymakers continue to stock its shelves throughout the holidays.

Toys R Us has hired restructuring lawyers at Kirkland & Ellis to help address the looming payments, the people said.

Hiring a law firm like Kirkland is not indicative of a bankruptcy filing, and many companies work with law firms to successfully refinance or restructure their debt without filing for protection.

The company has already announced it is working with Lazard to help address its debt load, and it successfully refinanced some of its debt just a year ago. Still, it has become increasingly difficult for leveraged retailers to tap the refinancing market, as lenders have become spooked by the increasing number of retail bankruptcies.

"As we previously discussed on our first quarter earnings call, Toys R Us is evaluating a range of alternatives to address our 2018 debt maturities, which may include the possibility of obtaining additional financing," Toys R Us spokeswoman Amy von Walter said in a statement.

"We expect to provide an update about these activities, as well as the many initiatives underway to provide an outstanding customer experience in our global retail locations and webstore during the holiday season, during our second quarter earnings call."

A man shopping in a Toys-R-Us store in Fairfax, Virginia.
Paul J. Richards | AFP | Getty Images
A man shopping in a Toys-R-Us store in Fairfax, Virginia.

Toys R Us will have its second-quarter earnings call on Tuesday, Sept. 26.

Toys R Us owners Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust either declined to comment or did not immediately have a comment. Kirkland also did not immediately have a comment.

The potential restructuring comes amid increased competition from both brick-and-mortar and online players. Big-box stores such as Wal-Mart have for years driven down prices of toys to draw parents into their stores to buy other more expensive goods. E-commerce giant Amazon.com has become an increasingly formidable competitor.

Toys R Us' baby-centered store, Babies R Us, meanwhile, has seen diaper sales fall as parents increasingly buy diapers through online subscription businesses offered by Amazon and other e-retailers.

Wayne, New Jersey-based Toys R Us blamed intense promotional activity and slowing baby business sales for its disappointing 2016 holiday results. The company, which relies heavily on holiday purchases to support its year-round business, saw same-store sales drop 3.4 percent from the previous holiday season.

The weaknesses have carried into the spring, with the company reporting in June that it had a net loss of $164 million in the fiscal first quarter of 2017, widening from $126 million a year earlier. Its same-store sales dropped 4.1 percent.

Toys R Us had roughly $301 million in cash on its balance sheet as of April 29.

Toys R Us has sought to address its challenges under the guidance of CEO Dave Brandon by expanding in Asia and investing in a new website and baby registry. It has also been downsizing its real estate footprint, including closing its Times Square flagship in 2015.

The retailer announced in August that it will be opening a 35,000-square-foot temporary shop in the historic Knickerbocker Building in New York for the holiday season. The retailer has an option to renew the lease to extend its stay, a source familiar with the situation said.

Toys R Us was taken private by KKR, Bain and Vornado in 2005 in a deal valued at $6.6 billion.

Its owners had tried to take the company public, filing for an initial public offering in 2010, but later pulled it, citing challenging market conditions. At that time, the toy industry was struggling to deal with the increasing popularity of electronic gaming apps.

A restructuring could help Toys R Us simplify a capital structure made complex by its trio of owners and get out of expensive leases. It would follow on the heels of several private equity-backed retailers that have filed for protection to tackle oversized store footprints and debt loads.

Golden Gate Capital-backed Payless ShoeSource for example recently emerged from bankruptcy after shuttering roughly 700 stores across the U.S. with goals to grow in Latin America.

Bain-backed Gymboree is closing roughly 350 stores in bankruptcy, in hopes of re-emerging with only its most lucrative stores.