(Reuters) - Toy retailer Toys ‘R’ Us Inc on Thursday asked the U.S. Bankruptcy Court for approval to stop paying all of its suppliers while it tries to line up buyers for its international business ahead of a planned liquidation of its U.S. operations.
The iconic toy store’s plan to liquidate inventory and shutter or sell its U.S. stores has put 30,000 jobs at risk and left vendors wondering where to send merchandise stuck on ships and trucks, and whether their invoices will ever get paid, lawyers said at a court hearing on Thursday.
As shoppers flock to Amazon.com Inc (AMZN.O) and children choose smartphones and screens over toys, Toys ‘R’ Us has struggled to boost sales and service debt following a $6.6-billion leveraged buyout by private equity firms in 2005.
At a hearing at U.S. Bankruptcy Court in Richmond, Virginia, Toys ‘R’ Us lawyer Joshua Sussberg said the company was working to avoid any contagion from the U.S. liquidation on the foreign businesses it is trying to sell.
Part of that effort means separating the U.S. business from foreign operations to ensure that shipments can reach stores in Canada, Europe and Asia, where the company will be reviewing bid proposals in coming weeks.
But lawyers for vendors said they did not know whether they would ever get paid for those goods.
Kenneth Eckstein, a lawyer on behalf of the official committee of unsecured creditors, called the precipitous liquidation “extremely disappointing and sad,” noting that hundreds of vendors, thousands of employees and millions of customers will suffer.
“This is the largest and most rapid deterioration of a retailer and maybe that any Chapter 11 has ever entertained,” he said.
Toys ‘R’ Us - the last major retailer focusing solely on toys - plans to liquidate inventory at 735 U.S. stores, including Babies ‘R’ Us locations, by the end of this year. The wind-down follows a bruising holiday season, when the company failed to stay competitive and sales came in well below projections. The quarter accounts for 40 percent of its annual net sales.
With the disappearance of Toys ‘R’ Us, everything from squishies and slime kits made by small companies, to board games and Barbie dolls by heavyweights Hasbro Inc (HAS.O) and Mattel Inc (MAT.O), will lose a top customer.
Hasbro said the pending liquidation and closure is expected to be “disruptive” in the near term.
Lutz Muller, president of consultancy Klosters Trading Corp, estimated a single-digit sales impact on companies like Mattel, Hasbro, Spin Master Corp (TOY.TO), Jakks Pacific Inc (JAKK.O), Funko Inc (FNKO.O) and MGA Entertainment Inc.
“Bad but not fatal,” Muller said. “But for the little guys that depended on Toys ‘R’ Us as a major showcase ... a large number will go to the wall.”
Jefferies predicted the bankruptcy would depress 2018 revenue across the industry by between 2.5 percent and 5.5 percent. It said 40 percent of the toy sales up for grabs would flow to Amazon and 30 percent to Walmart Inc (WMT.N).
Shares of Mattel fell nearly 3 percent while shares of Hasbro were trading slightly lower on Thursday; they had tumbled last week on Toys ‘R’ Us’ liquidation reports.
Toys ‘R’ Us’ creditors said in a court filing that Target Corp (TGT.N), Walmart and Amazon pricing toys at low margins, and a greater-than-expected decline in toy and gift card sales following its bankruptcy filing in September, led to the weak performance in the quarter.
Wayne, New Jersey-based Toys ‘R’ Us was already in the process of closing one-fifth of its stores as part of an attempt to emerge from one of the largest ever bankruptcies by a speciality retailer.
In September, when the company operated more than 1,600 stores globally, with roughly 800 stores outside the United States, it got court permission to borrow more than $2 billion to start paying suppliers.
But efforts to keep the business going collapsed after lenders decided they could recover more in a liquidation by closing stores and raising money from merchandise sales.
Seventy-year-old Toys ‘R’ Us does not rule out a last-minute offer for all of its stores and said it will announce the winning bidder of a March 29 auction on April 12.
More than 8,000 U.S. retail stores closed in 2017, roughly double the average annual store closures in the previous decade, according to data from the International Council of Shopping Centers.
Despite the threat of 30,000 job losses, experts do not expect retail employment and wages to be subdued in the near term. Approximately 700,000 jobs in the industry need to be filled, say retail staffing firms and trade federations such as the NRF.
Aly Sanchez, a two-year employee of Toys R Us in Kansas City, said, “It’s an overwhelming feeling not knowing what’s going to happen. And if we do close, we don’t know if we’ll even get severance pay.”
Reporting by Tracy Rucinski in Chicago and Abinaya Vijayaraghavan in Bengaluru; additional reporting by Aishwarya Venugopal and Nandita Bose; Editing by Sayantani Ghosh and Nick Zieminski