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No Happy Ending for Toys R Us, Becomes Latest Retailer to File for Ch. 11 Financial Restructuring

Store Closings Still To Be Determined; Babies R Us Affiliate Could Be Targeted
September 19, 2017
Toys R Us Inc. filed for Chapter 11 bankruptcy protection for its US stores and plans to do the same for its Canada operations as it announced plans to restructure $5 billion in outstanding debt as it seeks to establish a sustainable capital structure.

For now, the companies’ 1,600 stores around the world are continuing to operate as usual, the Wayne, NJ-based company said in its filings. That count includes 568 U.S. Toys R Us stores and 223 U.S. Babies R Us stores.

“Our business and overall ability to win have been significantly impacted by the costs associated with the $5 billion of debt on our balance sheet,” said Dave Brandon, chairman and CEO of Toys R Us. “This debt has held us back from making the investments we need to compete effectively in what has become an increasingly challenging and rapidly changing retail marketplace worldwide.”

Toys R Us' debt level is costing the company about $400 million a year in debt payments.

“As a result, the company has fallen behind some of its primary competitors on various fronts, including with regard to general upkeep and the condition of our stores, our inability to provide expedited shipping options, and our lack of a subscription-based delivery service,” Brandon said in court filings.

As part of the filings, the company has received a commitment for over $3 billion in debtor-in-possession financing from various lenders, including a JPMorgan-led bank syndicate.

While its current store base is open and operating normally, the retailer said changes are coming. It is currently performing a detailed review of its real estate portfolio, identifying underperforming stores and above-market leases as part of the restructuring process.

Toys R Us CEO Brandon said the company expects to use the court-supervised restructuring to close underperforming stores and renegotiate lease terms of other stores to current market levels.

In recent years, Toys R Us has closed stores as leases expired to reduce store count or square footage. It has also been combining its Babies R Us and Toys R Us retail stores under one roof. The company intends to continue combining more stores and open smaller-sized stores in the future.

Toys R Us leases a majority of their stores with a significant number of those locations concentrated with Simon Property Group (NYSE:SPG), DDR Corp. (NYSE:DDR), Kimco Realty Corp. (NYSE: KIM), and Brixmor Property Group (NYSE:BRX), the company said.

Toys R Us stores generated 76% of the company’s total gross revenue in 2016; Babies R Us 11%.

Filings in the bankruptcy case suggest that the real estate review could impact Babies R Us most. Toys R Us and Babies R Us stores both compete with other big-box retailers such as WalMart and Target, and online retailers such as Amazon. However, while Toys R Us does not face large, toy-focused competitors, Babies R Us competes with other baby-specific retailers such as buybuy Baby in addition to the discount general retailers.

Babies R Us’ performance has also been hurt by online “subscription” ordering models, where customers sign-up for regularly scheduled deliveries of products like diapers and formula, Brandon said in court filings.

Should the Ch. 11 restructuring succeed in freeing up operating capital, Toys R Us intends to take some of the debt savings to bolster its remaining real estate, Brandon said.

To revitalize their remaining portfolio of stores, Toys R Us plan to invest $276.6 million from 2018 to 2021. This investment will enable the company to convert existing stores into a “side-by-side” format, combining toy and baby offerings, and develop plans for small format stores in urban areas, he added.

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