Toys R Us Bankruptcy and Ongoing Retail Distress
Toys R Us has filed documents in U.S. Bankruptcy Court detailing plans to close all of its stores and liquidate its remaining inventory. This process will result in the closure of 735 stores and eliminate 33,000 jobs. Toys R Us earned fifteen percent of all toy-related revenue in the U.S., but could not sustain a viable, competitive business while saddled with a whopping $5 billion of debt.
The iconic toy company’s demise is the latest chapter in a massive, ongoing restructuring of the retail industry. This restructuring – caused in part by the shift in consumers shopping at “brick and mortar” stores to shopping online – has resulted in over 20 retailer bankruptcies in 2017. This trend has continued in 2018 with the recent bankruptcy filings of Claire’s and Bon-Ton.
The Toys R Us liquidation and ongoing retailer distress has both short-term and long-term implications for consumers and businesses.
Consumers should use their gift cards as soon as possible. Toys R Us has announced that it will only honor Toys R Us gift cards until April 14, 2018. After April 14, the gift cards will be worthless.
For all retailers, consumers should endeavor to use gift cards as soon as possible. The gift cards may become worthless on the day a retailer seeks bankruptcy protection, as retailers in bankruptcy are not obligated to honor the gift cards. In a chapter 11 bankruptcy proceeding, a holder of a gift card technically holds a general unsecured claim against the bankrupt company. General unsecured claimants often receive no payment, or pennies on the dollar, towards their claims.
Toys R Us liquidation will impact numerous businesses. Given the enormity of Toys R Us operations, the closure of the stores will have a ripple effect throughout the economy. Suppliers of Toys R Us face the double whammy: not receiving payment on the debts owed by the company while losing a significant customer going forward.
Landlords who own the land where the stores operate will soon hold large empty buildings and receive little or no recovery of their claims against Toys R Us. According to Mitch Nolen Retail, Toys R Us reportedly holds 35 million square feet of U.S. retail space, which is larger than all of the real estate combined held by Starbucks. Land owners, real estate developers and professionals will likely be very busy trying to reconfigure the empty stores and land.
Healthy retailers may feel the squeeze. Even retailers turning a decent profit may face difficulties in light of the current retail environment. Lenders may be more hesitant to loan or extend favorable credit terms to retail customers. Retailers may face more stringent credit terms from their suppliers, who could demand cash-in-advance or cash-on-demand, thereby hampering cash flow. And the empty, big box stores in numerous towns across America will continue to drive home the point with the consumer that traditional, retail shopping outlets may be a thing of the past.
For further information about this alert, please contact Jason Bank.
Jason W. Bank has 20 years of experience in bankruptcy and restructuring and general corporate law. He focuses his practice in the areas of commercial bankruptcy, out-of-court workouts, corporate restructuring and creditors’ rights. Jason is the chair of the firm's Bankruptcy and Restructuring Department.
Jason has successfully guided numerous businesses through out-of-court restructurings and Chapter 11 reorganizations. He has negotiated resolutions of complex financial issues and achieved consensual restructurings of creditor claims while avoiding bankruptcy or litigation. Where necessary, Jason has filed Chapter 11 petitions on behalf of businesses to protect their assets and operations. He has helped to reorganize businesses in a wide variety of industries, including automotive, health care, retail, construction, education, real estate, sports and entertainment. In addition to his bankruptcy practice, Jason provides general legal counsel to numerous small to middle market businesses and business owners.
Jason has considerable experience representing debtors, creditors’ committees, trustees, receivers and a wide variety of creditors in bankruptcy, receiverships, bankruptcy-related litigation, out-of-court restructurings and loan workouts. He has assisted numerous parties with buying and selling assets out of bankruptcy. Jason also has represented multiple parties in bankruptcy-related litigation, including prosecuting and successfully defending preferential transfer and fraudulent conveyance actions.
In addition to his bankruptcy practice, Jason provides general legal counsel and advice to numerous small- and middle-market businesses and business owners. He also assists businesses and individuals with resolution of tax collection disputes.
Jason has served as an adjunct professor of law at the Michigan State University College of Law on the subject of Chapter 11 bankruptcy reorganization. Jason is the immediate past President of the Detroit Chapter of the Turnaround Management Association and has served on the TMA’s Board of Directors since 2012. He frequently lectures to professional and trade associations, and publishes on the subjects of bankruptcy and restructuring. He represents Kerr Russell on the Southeast Michigan American Heart Association Metro Detroit Heart Walk Executive Cabinet.
Jason has been recognized as a "Michigan Super Lawyer" by Thomson Reuters and was named one of the Top 100 Attorneys in Michigan by this publication for 2015-2017. He was named a “Top Lawyer” by dBusiness Magazine in the area of Bankruptcy and Creditor/Debtor Rights.
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