Dear Commons Community,
Toys “R” Us announced yesterday that it will likely have to close all of its 730 stores and lay off more than 30,000 workers. My wife and I have been a big fan of this company for decades. For the past twelve years, we have especially enjoyed taking our grandkids to its stores either here in New York or where my daughter lives in Seattle. Toys “R” Us has found that it is no longer able to survive because of debt and private equity issues. Here is an analysis courtesy of the New York Times:
“The mood in the courtroom was hopeful when Toys “R” Us filed for bankruptcy last September. The company’s lawyer, in the first hearing, played a clip of the retailer’s famous jingle “I’m a Toys ‘R’ Us Kid” and vowed to restore the company’s place in the hearts of millions of American families.
The reality is that Toys “R” Us, which announced on Thursday that it would shutter or sell all of its stores in the United States, never had much chance at a turnaround.
For over a decade, Toys “R” Us had been drowning in $5 billion of debt, which its private equity backers had saddled it with. With debt payments siphoning off cash every year, Toys “R” Us could not properly invest in its worn-out suburban stores or outdated website. Sales plummeted, as Amazon captured more children’s desires — and their parents’ wallets — for Star Wars Legos and Paw Patrol recycling trucks.
Toys “R” Us is the latest failure of financial engineering, albeit one that could portend a potentially more ominous outlook for private equity in the digital era.
Most buyouts tend to work the same way. A private equity firm takes over a troubled company with the goal of sprucing up the strategy, cutting costs and overhauling the business over three or five years. But they often load up a company with debt to pay for the deal, which can prove problematic if the profits do not perk up.
In the age of Amazon, that formula can be dangerous. Consumer demands are changing so quickly that heavily indebted companies have trouble reordering their business to adapt and compete with better-funded rivals.
A wave of buyouts has collapsed in recent weeks, felled by digital competition.
Struggling in the streaming music age, iHeartMedia, the large radio company saddled with debt since its 2008 buyout, filed for bankruptcy this week. The regional New York grocery chain Tops filed for bankruptcy last month, citing competition from Amazon and the debt burden that its former private equity backers had heaped on it.
Other buyouts are looking shaky. The television company Univision, which recently scrapped plans for a public offering, is shaking up its leadership. The parent company of the Winn-Dixie supermarket chain said this week it was seeking to restructure its debt, as it planned to close stores.
Not all troubled private equity deals end with a company winding down, as in the case of Toys “R” Us. Retailers like Gymboree and Payless ShoeSource have found second lives after emerging from bankruptcy, often with investments from new private equity or hedge fund owners willing to give the business another try.
But the deterioration of Toys “R” Us from a potential turnaround strategy to the end of an iconic brand — in a matter of months — shows just how difficult it can be for private equity to compete in a rapidly evolving industry. In retailing, Amazon is reordering everything on the store shelf. And children’s changing interest in games and toys, which now encompasses high-end electronics, adds to the complexity.
The company said on Thursday that it had no other option than to begin winding down about 730 stores around the United States. Toys “R” Us was still looking at the possibility of keeping 200 stores open and combining them with its Canadian operations. But no deal had been struck yet.
“This is a profoundly sad day for us,” the Toys “R” Us chief executive, David Brandon, said in a statement, “as well as for the millions of kids and families who we have served for the past 70 years.”
A “profoundly sad day” indeed. There are lessons to be learned here.
Tony
