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Toys 'R' Us files for bankruptcy protection in US

Toys 'R' Us (Asia) says business as usual at its stores

The Toys "R" Us store in Times Square, New York. Toys "R" Us Asia runs 226 stores in China, Hong Kong, Taiwan and South-east Asiaand licenses 35 stores in the Philippines and Macau.

Singapore, Hong Kong

TOYS "R" Us Inc has filed for bankruptcy protection in the United States, but its joint venture in Asia says it remains unscathed and in fact, looks to be in expansion mode.

In a statement on Tuesday, privately-held entity and member of Hong Kong's Fung Group, Fung Retailing, said the stores under Toys "R" Us (Asia) are still open for business and "offering customers great service and a curated assortment of merchandise in the toy and baby categories".

It added that Toys "R" Us (Asia) is a joint venture which operates as a separate legal entity and is thus financially independent from all other Toys "R" Us operating companies around the world.

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Toys "R" Us Inc owns 85 per cent of Toys 'R' Us (Asia), and Fung Retailing, 15 per cent. Toys "R" Us (Asia) runs 226 stores in China, Hong Kong, Taiwan and South-east Asiaand licenses an additional 35 stores in the Philippines and Macau. In March, it integrated Toys "R" Us Japan, adding another 161 stores to the chain.

President of Toys "R" Us (Asia) Andre Javes said: "We are a financially robust and self-funding retail operation, which continues to significantly grow and invest in this region. Every year, we are opening new stores in all our markets and particularly in China, where we now operate over 135 stores; we will open another 22 in the coming weeks."

Data from the Accounting and Corporate Regulatory Authority (Acra) indicate that the revenue for Toys "R" Us (Singapore) dipped from S$67.1 million in 2015 to S$66.1 million last year (see amendment note); its earnings last year also fell to S$6.1 million, from S$6.75 million in 2015.

Mr Javes said that as the leading toy, baby and educational products retailer for children in Asia, Toys "R" Us (Asia) is "very focused on delivering our full-year results".

A spokesman from Toys "R" Us (Asia) said: "By the end of this year, we will have opened new stores in Hong Kong, Malaysia, Singapore, Thailand and Japan - in addition to the 22 in China. And 2018 is looking even stronger, with more than 40 scheduled to open across the region."

Toys "R" Us Inc is not part of the operations of Toys "R" Us Asia stores, he said, but did not comment on whether the stakes in the JV will change. Toys "R" Us Inc, one of the world's largest toy store chains and the go-to shop for birthday and Christmas gifts, was unravelled by its hefty debt load and consumers' rapid shift to cheaper online shopping in the US and Canada.

It was founded in 1948 by Charles Lazarus, a World War II veteran who started a baby furniture store in Washington DC to cater to the demand triggered by the post-war baby boom. In 1957, he opened the first Toys "R" Us store. It was a novel concept then - a toy supermarket with a broad assortment of products.

The company made the Chapter 11 bankruptcy filing in a federal court in Richmond, Virginia, late on Monday,acknowledging that it needed to revamp its long-term debt totalling more than US$5 billion (S$6.74 billion). With assets of US$6.9 billion (based on its most recent annual report), Toys "R" Us is the second-largest retail bankruptcy in the US, trailing the 2002 filing by Kmart, which had US$14.6 billion in assets, said research firm

Once a dominant player in the US toy market, Toys "R" Us, which also owns Babies "R" Us, has been struggling with the rise of discount stores such as Wal-Mart and Target; more recently, competition arrived in the form of Big-box chains such as Borders, Circuit City and Sports Authority struggled with similar competition.

Toys "R" Us said it received a commitment for more than US$3 billion in debtor-in-possession financing from lenders such as a JPMorgan-led bank syndicate. The new financing, subject to court approval, is expected to immediately improve the company's financial health and support its ongoing operations during the court-supervised process.

The company's Canadian unit intends to seek protection in parallel proceedings under the Companies' Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice, Toys "R" Us said in a statement.

A New York Times report said the financial plight of Toys "R" Us was exacerbated by a heavy debt load that has weighed on the company for years. It said the private-equity firms Kohlberg Kravis Roberts and Bain Capital, as well as the real-estate firm Vornado Realty Trust, bought the company in a leveraged buyout for about US$6 billion in 2005.

The company faces US$400 million in debt payment, which falls due in 2018, and was burning through its cash. It hired advisers, including the law firm Kirkland & Ellis, to come up with a plan.

In a statement on Monday night, Toys "R" Us said the filing would help the company invest in long-term growth and "fuel its aspirations to bring play to kids everywhere and be a best friend to parents".

Boh Wai Fong from the Nanyang Business School at the Nanyang Technological University said a key competitor for Toys "R" Us has been; the online retail giant used to be an ally, helping the toy store run its website until 2006, when the partnership ended.

"That was when Toys "R" Us created and ran its own website. Unfortunately, it was not as savvy as Amazon online," said Prof Boh (see amendment note).

She added that being a specialty shop, it also lost out to chains such as Walmart and Target, which are able to manipulate and bring down the prices of the toys while upping the prices of other products - "something that a toy specialist like Toys 'R' Us could not do".

Prof Boh noted that Toys "R" Us had also tended to put all its eggs into its fourth-quarter basket by banking on takings from Christmas sales, and hoping that this would make up for the slowdown in the rest of the year.

"This was a wrong move," she said.

That Toys R Us (Asia) could be doing better than its North American parent company does not surprise Karen Koh, Hong Kong business leader for consultancy firm HRnetOne. The Asian business could have benefited from a retail scene that has picked up this year, driven by demand by the Chinese middle class, and the fact that its operations are run separately from the US arm, she said.

Referring to the Hong Kong stores as an example, Ms Koh, who specialises in the consumer and retail industries, added: "In Hong Kong, Toys 'R' Us is run and operated by Fung Retailing (see amendment note) ... Maybe in the US, Toys 'R' Us is not doing well because of inefficiencies, but in Hong Kong, it's run well. At the end of the day, it is operations that matter."

Asked whether the company's Asian JV stores being unaffected signalled a rise of consumer power in Asia, Prof Boh replied: "We cannot generalise on that, but a rise in consumerism is definitely happening in China because of the increasing income levels there. The Chinese tend to spend more on branded goods."

Apart from e-commerce slowly killing brick-and-mortar shops, managing director of GlobalData Retail Neil Saunders pointed to one other trend - that toys have become less of a priority for children and teenagers, who would rather have smartphones and tablets or apps and games for these devices.

"With even the most basic of these products having a high price tag, there is often little left over - either from the child's budget or the gifting budget of parents and family - to spend on toys," he said in an e-mail to The Washington Post.

Amendment Note: An earlier version of this article carried a quote saying Hong Kong Toys 'R' Us stores are operated by Li & Fung. The stores are operated by Fung Retailing, which is under Li & Fung's parent company, Fung Group. The earlier version also cited Acra data on Toys "R" Us (Asia), when it should have been Toys "R" Us (Singapore), and also incorrectly referred to Prof Boh as an Assoc Prof. The article has been revised to reflect these amendments.