Toys R Us could file for bankruptcy as soon as this week, sources say

Key Points
  • Toys R Us could file for bankruptcy as soon as this week.
  • Toys R Us has been working with lawyers at Kirkland & Ellis to address its debt-load.
  • The potential bankruptcy comes ahead of the crucial holiday season, when the retailer does the majority of its sales.
Toys R Us could file for bankruptcy as soon as this week, sources say
Toys R Us could file for bankruptcy as soon as this week, sources say

Toys R Us could file for bankruptcy as soon as this week, according to sources familiar with the matter.

The sources noted that the bankruptcy plans are not definite, and both its plans to file and its timing could change.

A bankruptcy would help simplify a capital structure made complex by its trio of financial owners. Toys R Us was acquired by private equity firms Kohlberg Kravis Roberts and Bain Capital Partners and real estate investment trust Vornado Realty Trust in 2005 in a deal valued at $6.6 billion.

The three owners either declined to comment or did not immediately have a comment. The debt restructuring would help provide Toys R Us the financial flexibility to invest in its business as it repositions itself to combat a changing retail landscape.

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 holiday.

Toys R Us has hired restructuring lawyers at Kirkland & Ellis to help address looming $400 million in debt due in 2018, CNBC had previously reported, noting that bankruptcy was one potential outcome.

Kirkland declined to comment.

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

Earlier Monday, Reorg Research, a news service focused on bankruptcy and distressed debt, reported Toys R Us could file for bankruptcy as soon as Monday.

Tablets over toys

Toys R Us is an anchor in a wobbling industry. Toymakers have come under pressure from cheaper off-shore imports, margin squeezing big-box retailers and children who increasingly prefer tablets to toys.

Toymaker Lego announced plans to lay off 8 percent of its workforce earlier this fall. Mattel has watched its stock drop near 60 percent over the past five years, hurt by the loss of the Frozen toy license agreement to Hasbro and a shift in popularity of one of its core toys, Barbie.

On news of the imminency of Toys R Us' potential bankruptcy, Mattel and Jakks shares fell about 6 percent, while Hasbro shed more than 1 percent. 

Toys R Us made up 11 percent, 9 percent and 15 percent of Mattel, Hasbro and Jakks Pacific on 2016 global sales respectively, according to Jefferies analyst Stephanie Wissink.

A Toys R Us bankruptcy does not necessarily mean the company will close stores, and retailers such as Macy's have operated through bankruptcy before. For the major toy companies, there may be vested interest in Toys R Us successfully coming out the other end of a debt restructuring.

Beyond offering the toy companies a place to sell their products, the retailer often does so without marking their prices down as much as big box retailers like Target. The retailer's vast space and toy-centered raison d'etre give toy companies a unique venue to sell their product.

"They're the only true showroom the industry has," said toy industry analyst Richard Gottlieb.

The showroom is also important to movie studios, which use toys to market their movies. For example, Force Friday on Sept. 1 was a chance to debut all the toys inspired by the newest Star Wars movie, "Star Wars: The Last Jedi." Star Wars is produced by Walt Disney-owned Lucasfilm.

"If I want to run a major TV campaign with a product, I need to have Toys' support," said Gottlieb.

To be sure, the toy industry could wean their dependence off Toys R Us in the same way sports brands have moved from the struggling sporting good retailers, building up their own websites and direct-to-consumer business.  Direct-to-consumer sales are more profitable than going through a third-party retailer.

Toy companies could also narrow their assortment of goods, so they are less reliant on Toys R Us's vast shelf-space.

"Industry demand is resilient to these types of impacts, given growing alternative channels for purchase," said Jefferies' Wissink.

One of the quickest growing channels: Amazon. The e-retailer is the "beneficiary of [the] millennial parent," said Wissink, as Amazon is "quickly becoming the No. 2 toy retailer behind Wal-Mart."