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What Factors Led Toys “R” Us To File For Bankruptcy?

birds eye view of a toys r us from the 1990s

Jul,17,2018

By:Mike Cibik

 

In 1948, Charles Lazarus founded Toys “R” Us, what would eventually become a world leader in the sale of all things play. With over 800 stores in the United State at the beginning of 2018, consumers were completely unaware of the trouble that lurked just around the corner for the large toy chain. Most people would be shocked to discover that their beloved toy stores would close just a few months later. What went wrong. With a whopping $11 billion in sales in 2016, what could sink such a company to the point of bankruptcy?

 

To understand why people file for bankruptcy, one must look at the company profile, to put into light the situation that occurred, which led to the turbulent financial state.

 

The company’s history sheds light on what went wrong. In 2005, Bain Capital and Vornado Realty Trust orchestrated a $7.5 billion buyout, which overloaded the company with debt. By 2017, the company was limping along with $5 billion in liabilities from the buyout. It’s a sad day when a company as prominent and successful as Toys “R” U suffers such a blow, after so many years of excellent growth from its products. It is not an easy task to overcome, and yet, it is also not impossible with the correct steps. Bankruptcy attorneys believe that Toys “R” Us started at an inherent disadvantage because of the overwhelming debt.

 

The Decline of Toy “R” Us

Understanding bankruptcy is linked to understanding the current status of the company, specifically the current actions within the U.S. stores. With court proceedings that help consumers and businesses to alleviate their debts and pay back their competitors, bankruptcy is best handled by a bankruptcy lawyer, who is experienced and familiar with the generally unexpected twists and turns in the road.

 

In the case of Toys “R” Us, the company filed for Chapter 11 bankruptcy, which allows a corporation to offer a plan of reorganization to protect the business and help them pay creditors over an extended period of time.

 

The Chapter 11 Bankruptcy Plan

When companies file for Chapter 11, it is many times with the hope that they will be able to turn the situation around, regain their footing and move forward. That was the situation with Toys “R” Us, whose intention was to keep the store open by upgrading online sales, renovating stores and introducing augmented reality into their shopping experience.

 

This was the strategy for years prior, in the hopes of continuing to generate profits for the company as a whole. However, when the company filed for Chapter 11, it inadvertently created a whirlwind of frustration.

 

The current business profile of retail stores was not in their favor because bankruptcies have occurred at an accelerated rate for the retail industry over the past two years. As Toys “R” Us began to struggle, certain factors hindered the chances of recovery that they attempted, which resulted in the file for bankruptcy.

 

These factors included poor market timing, loss of vendors, and advancing competitors. The timing was unfortunate because they filed just before the holiday season, with a goal of acquiring the business of opportunistic shoppers. Instead, however, they merely created a detrimental distraction that further influenced the decline in their sales. The disturbance extended to their vendors, too, as companies feared Toys “R” Us would not have the financial backing to make good on their payments.

 

The final blow to their bankruptcy plan was the increased pressure from competitors, specifically the online competition of companies like Amazon. With guaranteed overnight and two-day shipping, consumers did not have to make last-minute in-store pick-ups. The cutthroat nature of the retail industry could be seen clearly as these competitors very intentionally reduced their prices to help finish off Toys “R’ Us when the company needed to increase profits drastically.

 

Companies need to be vigilant in understanding the level of competition on the market, because no matter how large a company is, bankruptcy is a decision away, depending upon management. It is essential to monitor sales and business operations consistently. Bankruptcy lawyers are invaluable when companies are faced with the prospect of filing for bankruptcy. These legal providers treat each situation uniquely and tailor plans that are focused on each company’s best interest.

 

 

If you or someone you know that is in need of help or how to file for bankruptcy with the best professional assistance available. Therefore, if you have any questions or potentially believe that you or your company are in need of a bankruptcy claim, please contact the Cibik and Cataldo P.C. team at (215) 735-1060 for a free consultation.

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