Myths Surrounding Toys R Us Bankruptcy
Toys R Us is an iconic American company. According to recent surveys, Toys R Us has a market share of more than 15%. With this market share, the company should be in a commanding position in the toys market. However, ironically it is filing for Chapter 11 bankruptcy. This means that it is still likely that Toys R Us will be in business after restructuring its debt. However, the fact that this iconic corporation has filed for bankruptcy has come as a shock for many. In such cases, the most obvious culprit is companies like Amazon. Online sales are being blamed for the death of every brick and mortar retail organization across the world. However, the case of Toys R Us is not so simple. There are many factors that have led to the eventual collapse of Toys R Us.
In this article, we will list down some of the prominent reasons which caused the Toys R Us bankruptcy. This should explain that Amazon and other companies selling products online are not the sole reason behind the poor performance and eventual bankruptcy of this company.
History of Toys R Us
Toys R Us was started in 1949. This means that the company has been surviving for several decades. Most of the adults in the United States had visited Toys R Us when they were kids. This is what has made the company iconic. For many decades, Toys R Us was a very profitable firm with very limited competition. They were listed on the stock exchange, and their stock was highly valued. However, all this changed in the year 2005. Toys R Us became the target of a leveraged buyout. This means that the company bought all the shares outstanding from current shareholders. The price paid for the company was $6.6 billion. Since the company did not have as much in cash reserves, most of the money used to purchase the organization was borrowed from a syndicate of private equity led by KKR. Not much financial information about Toys R Us has been available in the public domain since 2005. This is because the company went private and it was no longer necessary to publish their results. It is for this reason that most people were shocked to know that Toys R Us is in financial disarray.
Amazon Killed Toys R Us
The most obvious reason given by people for Toys R Us bankruptcy is Amazon. It is true that Amazon is nearly impossible to compete with. However, in case of Toys R Us it was not the only or in fact even the biggest reason. This is because Toys R Us woes had started much before Amazon became a force to reckon with. The company has been in trouble since 2005. Most of the financial distress was because of the high levels of indebtedness that resulted from the leveraged buyout. The death of Toys R Us can be attributed more to its humungous debt than to its competition with Amazon.
As per recent estimates, Toys R Us had as much as $5 billion in debt. This meant that the company was paying more than $500 million as interest payments every year. It is a known fact that Toys R Us would struggle to manage its operating cash flow because of these massive debt payments.
Also, because of these massive debt payments, Toys R Us was not able to allocate enough money towards its online presence. If Toys R Us had spent $500 million per annum on increasing its online presence, it would have been in a much better position by now. The story of Toys R Us is, therefore, a story about the perils of leveraged buyouts. In this case, a perfectly good company with 15% market share has been driven to the verge of bankruptcy because of unending and unmanageable debt servicing payments.
Low Prices Killed Toys R Us
It also needs to be noted that Amazon was not really the number one competitor for Toys R Us. Instead, the company was facing fierce competition from discount retailers like Wal-Mart, Costco, Macys and Sears. All these discount retailers account for more than 50% of the market share for toys. This is opposed to the meager 7% market share that is controlled by online companies like Amazon. There are two major reasons why Toys R Us was losing out to these retailers. Firstly, these places would provide toys at a much cheaper rate. Since Toys R Us was burdened with debt, they could not drop their prices in order to compete. As a result, Toys R Us went from being the place to shop for toys to the expensive place to shop for toys. Also, making toy purchases at large departmental stores is simply more convenient. Toys can be purchased along with other grocery items and a separate trip to a specialty toy store is not warranted.
The Rise of Video Games
With the advent of smartphones and tablets, most of the games are available for free online. As a result, the number of games being bought from physical stores has dropped. Also, kids nowadays are fonder of playing LAN based video games. Much of the inventory being stocked by Toys R Us and other specialty toy stores is simply obsolete.
To sum it up, Toys R Us was facing several financial obstacles. A poor capital structure, strong competitors, and obsolescence of their products are some of the many factors that led to the downfall of this once iconic corporation.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Corporate Finance - Introduction
- Nominal and Real Value of Money
- Fundamental Rules of Corporate Finance
- Present and Future Value of Money
- Net Present Value Calculations
- Compounding Intervals and Interest Rate
- What Are Negative Interest Rates ?
- The Consequences of Negative Interest Rates
- Opportunity Cost of Capital
- Valuing Cash Flows in Different Periods
- What is Perpetuity ?
- Growing Perpetuity
- What is Annuity ?
- Ordinary Annuity vs. Annuity Due
- Types of Annuity Calculations
- What is Bond Valuation ?
- Bond Market Conventions
- How Interest Rates Affect Bonds ?
- Stock Valuation Models
- Discounted Cash Flow Approach
- Assumptions During Stock Valuation
- What is Cost of Equity ?
- What is Payback Period ?
- What is Internal Rate of Return (IRR) ?
- Problems With Using IRR
- Capital Rationing & Profitability Index
- Types of Capital Rationing
- Capital Controls: Meaning, Types, Benefits and Downside
- Estimating Project Cash Flows: Part 1
- Estimating Project Cash Flows: Part 2
- Estimating Project Cash Flows: Part 3
- Capital Budgeting and Inflation
- Capital Budgeting and Depreciation
- Equivalent Annual Costs
- Investing and Financing Decisions
- Getting Creative with Capital Budgeting
- The Fallacy of Creative Destruction
- Companys Risk vs. Project Risk
- How Governments around the World are Bankrupting Future Generations for Present Consumption
- Role of Credit Rating Agencies in Determining Attractiveness of Companies and Countries
- Federal Reserve Announcement to Taper Quantitative Easing
- How Do Funds Transfer Systems Work
- The Importance of KYC (Know Your Customer) Norms and Procedures in Banking
- Difference between Corporate, Retail, Investment Banking, and Private Banking
- Impact of Geography on Banking and its Functions
- Functions of a Central Bank in Modern Economies
- Lease Rental Discounting
- Lending Against Intangible Assets
- Real Reasons behind FDI in Retail in India
- Microfinance: A Cure for Poverty
- Microfinance: Indebting the Poorest in the World
- Behind the Scenes of an Initial Public Offer (IPO)
- Pros and Cons of Going Public
- Snapchat IPO: Is this the New Tech Bubble ?
- Benefits of Delaying Profitability
- Why Do Corporations Get Away With Tax Avoidance ?
- After Effects of the Nirav Modi Scam
- The Panaya Acquisition
- The Flipkart and Wal-Mart Alliance
- The Worlds Largest IPO
- Initial Coin Offerings: A Primer
- The Aftermath of the Qualcomm Deal
- What are Demergers: Its Pros and Cons
- Benefits of a Holding Company
- The Economics of Lawsuits
- Protectionist Sentiment over Flipkart Takeover
- The Impact of Tariffs on the Energy Sector
- Venture Debt A Primer
- Interest Rates and Automobile Sales
- How Should Companies Communicate With Wall Street?
- How an Interest Rate Hike Will Affect the Government of USA
- Is Tesla Close to Bankruptcy?
- Myths Surrounding Toys R Us Bankruptcy
- The Economics of 'Soda Taxes'
- Why Elon Musk's Tesla Should Go Private and Why It Won't?
- Why the Xiaomi IPO Failed?
- How A Whatsapp Message Nearly Took Down A Company
- The Case for Index Funds
- The Sears Bankruptcy
- The Socialization of Losses
- The Sudden Downfall of IL&FS
- Why Healthy Corporate-Regulator Tussle is Good for Free Market Capitalist Economies
- What Happens When Businesses Go Bankrupt? Insolvency, Aftermath, and Recovery
- Alibabas Singles Day
- Ubers New Businesses
- Goldman Sachs and the 1MDB Scandal
- The Amazon Divorce
- Are Index Funds Not A Good Investment In India?
- Can Brick And Mortar Stores Compete With Amazon?
- Why is the Fed Still Raising Interest Rates?
- Problems Related to Facebook, WhatsApp, and Instagram Mega Merger
- The Whatsapp-Facebook-Instagram Merger
- What Is The DHFL Scam?
- Financial Troubles In the Fracking Industry
- Flipkart Circumvents Indias FDI Norms
- Subprime Automobile Loans in America
- The Jaguar Land Rover Debacle
- The Kraft - Heinz Fallout
- Why Uber Should Be Regulated?
- Is Regulation of the Tech Sector Long Overdue with the Tech Giants being Too Big
- The Fall of An Ambani Scion
- Litigation Funding: A Primer
- The Finance behind the Plastic Problem
- The MasterCard Visa Duopoly
- Is the Lyft IPO Overpriced?
- The Alliance between Car Companies and Ride Hailing Apps
- The Amazon Divorce Deal
- The Lawsuit Between Spotify and Apple Corporation
- The Story Behind the L&T- Mindtree Takeover Bid
- Do IPOs Affect Competitive Firms?
- Can Cost Cutting Turn Out To Be Expensive?
- The Economic Impact of Facebook Outage
- The Apple-Qualcomm Legal Battle
- Cross Border Credit Reporting
- The Sudden Deluge of Unicorn IPOs
- The Wow Airline Debacle
- The WeWork Business Model
- Problem with Private Securities Offerings
- The Amazon FedEx Breakup
- The Decline of the Big Corporation
- The Gap-Old Navy Breakup
- Apples Acquisition of Intels Modem Business
- Mergers and Acquisitions: A New Perspective
- The CBS-Viacom Merger
- Why are Sprint Wireless and T-Mobile Funding their own Competition?
- Why are Corporations Hoarding Trillions in Cash?