By Pam Martens and Russ Martens: March 9, 2018
After seven decades, Toys ‘R’ Us may have run out of options and be forced to liquidate all of its U.S. stores according to media reports. (The company called the reports “speculation.”) Toys ‘R’ Us had filed for bankruptcy protection on September 19 of last year, listing assets of $6.57 billion and debts amounting to an astounding $7.89 billion.
If the news reports are accurate, more than 36,000 U.S. jobs could be at stake. According to the company’s 10K filing with the Securities and Exchange Commission on April 12, 2017, as of the beginning of last year, the company employed “64,000 full-time and part-time individuals worldwide, with 36,000 domestically and 28,000 internationally.” Those figures, the filing said, do not include the tens of thousands of part-time employees the company hires for the holiday season.
The liquidation would also put a vast quantity of empty commercial buildings on the market. According to the company’s website, it has 564 Toys ‘R’ Us store locations in the United States plus another 230 Babies ‘R’ Us stores.
Its international footprint is also sprawling. The Toys ‘R’ Us website reports that its has “765 international stores and more than 245 licensed stores in 37 countries and jurisdictions.” It is not known what the company plans to do with the bulk of those operations. In addition to troubles in the U.S., in an SEC filing on February 23 of this year, the company wrote that it would be shuttering operations in the U.K. The filing said:
“On February 27, 2018, as part of the overall restructuring plan of the Company, Toys ‘R’ Us Limited and certain of its U.K. affiliates constituting the U.K. business (the ‘U.K. Subsidiaries’), commenced an administration under the U.K. Insolvency Act 1986 (the ‘Administration’). Pursuant to the Administration, the U.K. Subsidiaries will begin winding down business operations in the United Kingdom.”
The problems besetting Toys ‘R’ Us are a combination of its private equity/leveraged buyout in 2005 and the fact that big box retailers like Walmart and Target are able to undercut its pricing in its most important holiday selling season, where it achieves approximately 40 percent of its total annual sales.
In the Toys ‘R’ Us annual report for its fiscal year ending January 28, 2017, the company had this to say about competitive forces putting the future of the company at risk:
“The retail industry is highly and increasingly competitive and our results of operations are sensitive to, and may be materially adversely affected by competitive pricing, promotional pressures, competitor credit programs, additional competitor store openings, growth of e-commerce competitors and other factors. As a specialty retailer that primarily focuses on toys and baby products, we compete with discount and mass merchandisers, such as Walmart and Target, as well as Internet and catalog businesses, such as Amazon.com, national and regional chains and department stores and local retailers in the markets we serve. We also compete with national and local discount stores, consumer electronics retailers, supermarkets and warehouse clubs.”
According to the website bizfluent.com, Walmart has been eating Toys ‘R’ Us’ lunch since 1999 and now commands 30 percent of the retail toy market, estimated to be a total market of $22 billion. The number of Walmart stores, at 9,000, dwarfs every other brick and mortar retailer. Toys ‘R’ Us ranks a distant second behind Walmart in toy sales, according to bizfluent, with just an 18 percent market share. Target ranks a close third with a 17 percent share of the market.
Unlike its top competitor, Toys ‘R’ Us is buried under crushing debt thanks to its leveraged buyout in 2005. That year, private equity firms KKR and Bain Capital and the real estate investment firm, Vornado, took the company private. The trio injected $1.4 billion in cash and borrowed a whopping $5 billion to complete the deal. Bain Capital is the firm that was founded by former Presidential candidate Mitt Romney and it’s the business that made his quarter of a billion dollars in wealth possible by taking firms private and burying them under junk bond debt financing.
According to a 2012 Vanity Fair article by Scott Helman and Michael Kranish, over Mitt Romney’s 15 years at Bain Capital (which he founded in 1984) “the firm invested about $260 million in its 10 top deals and reaped a nearly $3 billion return” for its investors. The dark side of these riches, note the authors, is this: “Maximizing financial return to investors could mean slashing jobs, closing plants, and moving production overseas. It could also mean clashing with union workers, serving on the board of a company that ran afoul of federal laws, and loading up already struggling companies with debt.”
As Romney now makes a run for Senator from Utah, Toys ‘R’ Us workers are learning firsthand about the dark side of private equity deals and at just what price to the country the 1 percenters have amassed their wealth.
