March 21, 2018

Toys R Us Bankruptcy and Ongoing Retail Distress

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.