Back in September, Toys R’ Us admitted it was in serious financial trouble, and last week, rumors began to fly that the company was facing its financial end. Unfortunately, this week it’s been confirmed the rumors are true: Toys R’ Us is offically closing all its 800 US stores.
The company’s problem is simple. In 2005, the company was purchased in a leveraged buy-out, which essentially is a company bought by an outside financier, with the collateral on the loan being the company itself. Toys R’ Us faced what amounted to $400 million just in interest payments, forget paying off debt. It had been repeatedly refinancing its debt, but that option appears to have run out as investors have decided the company will never solve its debt problems, especially as Amazon and big-box retailers eat into its margins.
This will have knock-on effects: 33,000 jobs are likely to be affected by the closings, and toymaker stocks took a hit on just the rumor of Toys R’ Us, which moves 10% of all toys in America, would close. It’s also a real estate issue; Toys R’ Us has hundreds of locations, with thousands of square feet. And it ratchets up the pressure on other retailers in a similar situation. Toys R’ Us wasn’t the first to face this problem, and it’s not going to be the last.