“There’s a magical place, we’re on our way there, with toys in their millions, all under one roof – it’s called… Toys R Us!”
The lyrics resonate with millions worldwide. The advert is as iconic as Coca Cola’s “Holidays Are Coming” commercial or the Sainsbury’s “Christmas is for sharing” World War 1 cinematic ad. Sadly, there is no longer a magical place aura emanating from the retail giant, but a sobering reality that its financial disarray may lead to the company’s demise.
Toys R Us UK is facing the potential closure of its 106 stores, which may result in the loss of 3,200 jobs. The retailer has failed to instil confidence in the state-backed Pension Protection Fund (PPF) to approve a planned restructure. The proposed company voluntary arrangement (CVA) would involve the permanent closure of at least 26 loss-making stores, but has the potential to salvage the business.
The troubled company must raise around £9 million to contribute to the Toys R Us UK pension fund, given that Toys R Us Holdings’ latest set of accounts at Companies House show a pension deficit of £18.4m in January, up from £10.25m a year before. The PPF fear that without the extra investment, the pension fund will be depleted. Clearly, the PPF is signalling that companies cannot readily dismiss their obligations to fund and should proactively manage their finances accordingly.
Malcolm Weir, director of restructuring and insolvency at the PPF, said: “We continue to work closely with the trustees of the Toys R Us pension scheme and externally appointed advisors, given the current CVA proposals. The pension scheme is already underfunded and, if we were to vote in favour of the CVA, we would need actions taken that ensure the position of the pension scheme was not going to further weaken. Whatever the outcome of the CVA, the pension scheme members can be reassured that they remain protected”.
The commercial reality
The group’s US parent is unlikely to meet the £9 million shortfall, having filed for Chapter 11 bankruptcy protection in September with $5bn (£3.6bn) of debt. According to Bloomberg, the complications arose from the legacy of a $7.5bn leveraged buyout in 2005 by the private equity firms Bain Capital, KKR and the property investor Vornado Realty Trust.
Notwithstanding the fallout from the buyout, the traditional department store business model has been superseded by the dominance of the online market. With costly rental overheads and a decline in sales, the Toys R Us UK business has made a loss for seven out of the past eight years.
The nostalgia of travelling to Toys R Us with parents in the run up to the festive season has become out of fashion. Formerly, the most attractive prospect of huge department stores for consumers was the scale of selection and ease of convenience of having everything available in one place. From exuberant infants to apathetic teens, stores like Toys R Us had something for everyone.
However, the attraction of online retail is unparalleled. The range of selection available to consumers at the swipe of a finger plus the convenience of next day delivery to your doorstep is a winner. Prices for online goods are far more competitive and a consumer can easily compare prices between online retailers. Bricks and mortar stores will have to adapt to this challenge expeditiously or face extinction.
Larger retailers like Toys R Us have to date failed to adapt. They initially teamed up with Amazon to launch their online arm in the early 2000s, but this enterprise was ended abruptly in court. The struggle was acknowledged by UK Managing Director Steve Knights who commented that the “warehouse style stores” were “too big and expensive to run in the current retail environment.”
A glimmer of hope?
The fate of the much-loved retail giant rests with an acceptable restructuring solution that satisfies creditors and the PPF. With a twinkle of optimism, Mr Knights added, “If approved by the creditors, the CVA plan would substantially reduce the UK Company’s rental obligations and allow the business to move to a new, viable business model”. Sadly it might not get the chance and as the week unfolds and talks continue, it remains to be seen whether there will be a Christmas restructuring miracle for the “magical place“.