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End of the Line for Toys R Us as Retailer Plans to Close Remaining Stores Totaling About 38M-SF

Timing of Bankruptcy Filing Last Fall Before Crucial Holiday Sales Season Contributed to Sales Below "Worst-Case" Projections
March 15, 2018
Beloved by kids and landlords but largely shunned by consumers this past holiday shopping season, Toys R Us officially announced this morning that it was calling it quits and would wind down operations, closing its remaining 735 stores in operation encompassing an estimate 29.3 million square feet of mostly big box retail space.

The Wayne, NJ-based toy retailer had already closed or planned to close 8.5 million square feet of its brick and mortar stores as part of the Ch. 11 bankruptcy reorganization it initiated last September. Today's move impacts nearly 33,000 employees, who were told of the company's decision yesterday.

It also wipes out about $1 billion in property value, according to Toys R Us estimates of the difference in value of 791 occupied vs unoccupied stores. The appraised value of the stores unoccupied was listed at $1.55 billion. Toys R Us owns 273 of those stores and either leases or ground leases the other locations.

"I am very disappointed with the result, but we no longer have the financial support to continue the company’s U.S. operations," said Dave Brandon, chairman and CEO of Toys R Us, in announcing an "orderly process to shutter" its U.S. operations.

Despite the closing announcement, there is still a chance that up to 200 U.S. stores could remain open. Toys R Us is negotiating a deal for its Canadian operations and the bidder is reported to be interested in a transaction that could combine up to 200 of the top performing U.S. stores with the retailer's Canadian operations.

A spokesperson for Van Nuys, CA-based toymaker MGA Entertainment Thursday confirmed that CEO Isaac Larian and affiliated investors have made a bid for the retailer's Canada operations.

"If there is no Toys R Us, I don’t think there is a toy business," Larian said in a statement. "Toys R Us Canada is a good business. They run it efficiently, and have good leadership. At the right price, it makes economic sense."

While discussions continue on this potential transaction, Toys R Us is seeking court approval to implement the liquidation of inventory in all the U.S. stores, subject to a right to recall any stores included in the proposed Canadian transaction.

At least one expert said that the flood of retail space resulting from the closure doesn’t necessarily represent a catastrophe for the industry.

"Everybody who has Toys R Us in their portfolio, whether you’re managing it or you own it, has been looking for alternate uses really for the past couple of years,” said Gregory Maloney, president and CEO of Retail, the Americas, for JLL. “We didn’t anticipate a full liquidation, to be honest, but we did anticipate a lot of store closures. They announced last year that they were going to close 250 of them... We’ve been prepared for it for the most part, looking for alternate uses for that space or to fill it up with some of the people who are expanding, like Ross or TJ Maxx and so forth.”

Discount clothing retailer Ross announced earlier this week it plans to open 100 new locations this year.

"So really it’s just confirmation now that this is what’s going to happen," Maloney said. "Quite frankly, it sounds a little strange but now that we know it’s a lot easier to deal with than the unknown. The past couple of years have been, ‘well, do you think we’re going to get this back?' Now that we know what we’re up against, we can start getting to work and fill the space."

Malls are being reimagined with other uses replacing retail - such as office, hotel and multifamily uses - which could be options for the Toys R Us space, he said.

In addition, the giant toy retailer often took so-called endcap space, at the corner of malls, which is desirable for other commercial tenants, according to Maloney.

"Good locations are always easy to fill," he said.

And of Toys R Us’ roughly 700 stores overall, “probably half of them are great locations, where a lot of those developers want that space back anyway,” according to Maloney.

Jeff Holzmann, managing director of iintoo, a real estate investment firm in Manhattan, wasn’t quite so upbeat about the situation.

“When you think of the basic equation of supply and demand, when you think about the sheer footage that they’re going to be dumping in the market, probably within the next 12 months, that’s going to cause without a doubt a situation that we call a supply surplus,” he said. “So right off the bat that’s going to create a downward pressure on the rental prices in those submarkets. But we have to be very careful because the devil’s in the details.”

Holzmann said that some of the Toys R Us stores are not in malls, but are adjacent to them with large square footage, the kind of space that expanding fitness centers or activity gyms for kids and other national chains might be interested in.

“The sheer size of square footage that’s being dumped into the market is going to overwhelm any potential offset demand,” Holzmann said. “There’s going to be a surplus supply without a doubt. The question now becomes what kind of chain, and to what extent, can seize the opportunity. There is certainly going to be some, because the market is always going to seek equilibrium. And there are chains that are growing in this economy specifically in and around malls. But I think the volume here and the trend here is alarming.”

Meanwhile, the liquidation process will take time, according to Maloney.

“Everybody thinks they (the Toys R Us stores) close tomorrow,” he said. “It doesn’t happen that way. It’s generally an organized closing. They need to liquidate all of the merchandise, and you can’t just send it to one store. And that will be good for the owners because it gives them time. 'OK, This store is going to be closing, this is when it’s going to close, what players are in the market and let’s go after them and get them.’”

Although Toys R Us officials said they did not foresee today's outcome when the retailer initially filed for bankruptcy reorganization last fall, the timing of the bankruptcy heading into the crucial holiday shopping season appeared to contribute to a negative perception among shoppers regarding the retailer's viability.

The retailer reported dramatically lower than expected holiday sales, which the company had been counting on to bolster support among its creditors, the company detailed in a bankruptcy court filing yesterday.

Holiday sales came in well below its worst-case projections. The company also cited a combination of other factors, including delays and disruptions in its supply chain and increased price competition with Target, Walmart and Amazon, the company said.

Following the holiday sales season, Toys R Us projected that its cash-burn was expected to reach between $50 million to $100 million per month.

"It became clear that a significant investment of several hundred million dollars would be needed just to keep 400 stores operating before the 2018 holiday season," the company said.

As of yesterday, the retailer said it had contacted over 40 parties regarding potentially financing or purchasing any or all assets of the U.S. business, a deal that would have required a commitment of over $250 million just to cover cash-burn until the 2018 holiday season.

"Put simply," the company said, "in these circumstance, no parties were prepared to underwrite the U.S. operations as a going-concern."

Faced with those circumstances, Toys R Us determined that the best way to maximize their recoveries was to liquidate its remaining inventory and go out of business.

Editor's Note: CoStar New Jersey reporter Linda Moss contributed to this report.
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