This morning's New York Times headline was certainly a jolt: "Toys ‘R’ Us Is Said to Hire Advisers to Help Weigh Bankruptcy". It's not entirely a surprise. After all, the company has been struggling with overhanging debt for years. Still, it is disruptive to an industry that largely stakes it fortunes on Walmart, Target and yes, Toys R Us.
Here is how the New York Times article puts it:
Toys “R” Us has hired restructuring advisers from the prominent law firm Kirkland & Ellis as it tries to cope with hundreds of millions of dollars of debt coming due, according to two people briefed on the matter. Among the options that the retailer, which is owned by private equity firms, is considering includes filing for bankruptcy, the people said (my bolding)
The company, based in New Jersey, is still holding out hope that it can refinance the debt. But the hiring of the restructuring lawyers by a financially troubled company usually suggests that bankruptcy is a real possibility.
(Gulp!). But should we be overly concerned by the news. BMO Capital's Gerrick Johnson does not think so. Gerrick has been covering the toy industry for years and is a recognized expert on the toy industry in general and its major players in particular. In a memo he released this morning he states:
TRU's struggles have been well documented and we expect the company will be able to restructure its debts and extend its maturities, as it has done in the past. We think the headline presents a more dire situation than the reality (bolding is mine)…We have spoken to several toy company executives and none has expressed concern about its current TRU receivables not being paid. It's not a concern we had heard, either.
Still, it is worrisome. Toys R Us is a major tentpole for the toy industry and their loss, while undoubtedly good news for their competitors, it would be a blow to many mid-sized toy and play manufacturers. It would not be good for Mattel, Hasbro or Lego either as it would concentrate even more buying leverage with Target and Walmart.
So, I agree with Gerrick's analysis. He is correct, it is not a time to be worried. It is, however, a time to be alert and aware. Let's hope that Toys R Us can put this to bed quickly. In the meantime, stay tuned.