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What Could Come Next for Toys ‘R’ Us?

By Bill Kehoe, Senior Advisor, Dacarba LLC an Opportune LLP company 

Toys “R” Us is not the first high-profile retailer to file for bankruptcy in recent memory but, arguably, it is the first one that owned a category in consumers’ minds and hearts. Since its transition from a children’s furniture store to its iconic moniker in 1958, generations of families and children have made it a joyful retail destination. 

For years, retailer Toys “R” Us has been stuck in its own untenable version of the film “Groundhog Day” laden with massive debt and a changing competitive landscape fueling recurring rumors of bankruptcy. Toys “R” Us kept getting up the next day to try it again – that is, until March 20, 2018, when the bankruptcy court for the Eastern District of Virginia in Richmond granted the company interim approval to begin the orderly wind down of its estate and operations.  

Following its initial filing, the bankruptcy proceeded along a relatively predictable trajectory, but despite management’s ambitious plans heading into Chapter 11 bankruptcy to preserve the company as a going concern, 2017 holiday sales were lackluster, competitors tasted blood, vendors got nervous and now this iconic toy store will soon cease to exist, at least in the form that we have all known. 

So, what happens next?  As the remaining valuable assets are evaluated and picked over by interested parties – and there should be many – let’s look at who may be kicking the (plastic toy) tires and why. While there are characters (iconic Geoffrey the Giraffe) and other intellectual property, the crown jewel is clearly the Toys “R” Us mark. 

Rarely does a retail store brand transition and continue to translate in the market. We have seen the likes of Kmart, Radio Shack, Payless ShoeSource and dozens of others file for protection or shutter their doors. On the recent shortlist, FAO Schwartz (sold by Toys “R” Us in 2016, ironically) and Sharper Image have had some measure of success under ThreeSixty Group ownership, a private firm that has strong sourcing and retail expertise, which has been able to revive the trademarks in part via licensing and introduced a dying brand to new generations of consumers. Someone like ThreeSixty or one of the brand management companies (i.e., Sequential, Authentic Brands or Saban Brands) could benefit from a strong brand like Toys “R” Us. 

Challenges to this theory include the toy market being dominated by established entertainment and other brands that would need to play ball with an owner that could be seen as competitive. 

Another theory is a major retailer would benefit from the Toys “R” Us banner over its online and brick and mortar “toy aisles”.  Amazon, arguably one of the major reasons Toys “R” Us is in this position, could benefit from branding its online toy marketplace. Further, with Amazon’s modern and calculated entrance into operating physical stores, it could benefit from permanent or “pop up” Toys “R” Us locations during peak buying periods.  Walmart or Target could also be in the mix and create in-store and online Toys “R” Us “shop-in-shop” experiences that could help them in their eternal tug-of-war for the attractive young family demographic. 

Finally, major grocery and cash-flush drug store chains continue to expand their offerings, including toys and games. Branded toy aisles and higher profit endcaps and point-of-sale displays could be an interesting angle if a traditional player doesn’t emerge. Would an offer from one of these retailers be substantial enough to satisfy the bankruptcy court?

With high-profile creditors, about 800 locations, sophisticated debt holders and a brand that could be game-changing for a diverse list of potential owners, it’s hard to believe we’ve seen the last of Toys “R” Us.  In any event, what happens next will be worth watching.

Bill Kehoe
Senior Advisor
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