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More than a toy store: Toys 'R' Us closing will have massive impacts across the US

Posted: 1:47 PM, May 15, 2018
Updated: 2018-05-22 16:17:38Z

It was a rite of passage. A special treat. A moment of pure joy.

Millions of children have fond memories of picking out toys at Toys ‘R’ Us. 

For at least four generations, the largest toy store chain in the United States was an icon. 

Adults who grew up in the 1980s and 1990s have the “Toys ‘R’ Us Kids” jingle forever implanted into their consciousness. 

I don't wanna grow up, I'm a Toys R Us kid
they got a million toys at Toys R us that I can play with
I don't wanna grow up, I'm a Toys R Us kid
they got the best for so much less, it'll really flip your lid
From bikes to trains to video games
it's the biggest toy store there is (gee whiz!)
I don't wanna grow up, cause maybe if I did
I couldn't be a Toys R Us kid
more games, more toys, oh boy!
I wanna be a Toys R Us kid

And then there's Geoffrey the Giraffe.

The chain’s mascot since 1969 is arguably just as recognizable as Ronald McDonald.

“Toys ‘R’ Us was everything,” said Charlene Edwards, a 31-year-old mom from Fort Myers, Florida. “They usually had a giraffe call you on your birthday and wish you happy birthday.”

That tradition, along with many others connected with Toys ‘R’ Us will end in the next few weeks. In March, the toy giant announced that “the biggest toy store there is” would close all of its stores. 

The company had filed for bankruptcy in September – one of the largest retail bankruptcies in history.

For parents, grandparents and “Toys ‘R’ Us kids,” the closure is the end of an era.

And as economic tempests go, the bankruptcy and liquidation of Toys ‘R’ Us is a doozy: Up to 33,000 jobs lost, up to 735 U.S. stores closed and billions of dollars in debt that could go unpaid.

The chain is closing because of pressure from online retailers and a massive debt the company’s private-equity owners struggled to handle. 

While kids won’t understand the complicated business principles that led to the chain’s demise, the end of Toys ‘R’ Us will have wide-ranging impacts across the U.S.

In just the Cincinnati-area alone, a WCPO analysis found $4.2 million in claims for unpaid rent, utility bills, taxes and vendor payments involving at least 10 different entities .

All told, the emotional and financial impacts could be far reaching.

Ceilene Gonzalez, 6, carries a bag with toys as she shops with her mother at the Toys "R" Us in Times Square the day after Thanksgiving November 23, 2007 in New York City. (Getty Images file photo) 

What went wrong?

It was a jolt on March 15, when Toys ‘R’ Us announced it would pursue “an orderly wind-down of its U.S. business” after years of struggling with a $5 billion debt load from a 2005 leveraged buyout.

Bain Capital, Kohlberg Kravis Roberts and Vornado Realty Trust paid $6.6 billion to take the company from a publicly traded company to a private entity as part of a consolidation strategy that led to the 2009 purchase of rivals KB Toys and FAO Schwartz. 

Toys ‘R’ Us owners tried to take the company public again in 2010 but declining sales and a weak initial public stock offering market led them to give up on that idea in 2013. 

At the same time, online shopping giant Amazon’s rise put pressure on Toys ‘R’ Us, pinching profits and eroding market share. 

So, the company that disrupted the toy industry with low prices and a vast inventory found itself disrupted by a digital rival that could deliver an endless supply of toys for less.

When Toys ‘R’ Us filed for bankruptcy in September, it joined a list of more than a dozen other retailers who sought bankruptcy protection in 2017 . The list includes The Limited, Radio Shack, HH Gregg and Gordmans.

But Toys ‘R’ Us has a much bigger impact than those other bankruptcies. The toy giant is the third largest retailer ever to file for Chapter 11 bankruptcy, according to Bankruptcydata.com. Only the Kmart and Federated Department Stores bankruptcies were bigger. The Bankruptcydata.com site ranks bankruptcy sizes based on the amount of assets. It looks back to 1978 when Chapter 11 as we know it began.

The chain’s heavy debt load kept Toys ‘R’ Us from investing heavily in e-commerce and experiential retail, two strategies that have restored some measure of growth for Cincinnati-based Macy’s.

“This is one of the larger ones but it’s not a big surprise,” said John Chang, first vice president for research services at Marcus & Millichap, a commercial real estate firm based in Calabasas, Calif. “Toys 'R' Us had financial challenges ever since they went through the leveraged buyout so they were never able to effect change and adaptation to a modern retail climate.”

Memorable moments

Don’t try explaining all of that to your 7-year-old.

Charlene Edwards and her daughter, Jazzmin, have been making trips to the Fort Myers Toys ‘R’ Us on special occasions for years.

“We are going to Toys ‘R’ Us today because my baby is on the A honor roll,” Edwards said before a trip in April. “And she deserves it. She’s been really good in school, so I’m glad they’re not closing yet.”

For Edwards and 7-year-old Jazzmin, there’s something different about going to the toy store instead of ordering a toy online.

First, Jazzmin said Toys ‘R’ Us means less wait time for a toy -- that extra two days of waiting for a toy to arrive after ordering online can feel like a lifetime for kids.

There’s also the experience of seeing the toy “from bikes to trains to video games” on the shelves and picking it out.

“You can buy your kids’ stuff online, and, yeah, you know the UPS might knock and be like, ‘Hey, here you go.’ But it’s different when you go to the store and have variety,” Edwards said.

 
Going to the store adds meaning, mom says

For some parents and grandparents, the nostalgia of those toy store trips were something they passed along to the younger generation.

“The one in Ann Arbor I remember walking around with my parents looking and shopping for things,” said Michael Murphy from the Detroit area. “And I was hoping to be able to do that with my grandson, and now, he’ll be a year (old)… and it’s just not going to happen.”

For parents like Edwards, that’s a big loss.

“I’m glad (Jazzmin) was able to experience it,” Edwards said. “Because what about the kids who will never know what Toys ‘R’ Us was?”

What about the employees?

While customers will miss Toys ‘R’ Us, more than 30,000 employees are now out of work -- with no severance and no payouts of their vacation time.

Some employees are petitioning for severance. According to Bloomberg, the petition calls for Bain Capital, KKR & Co. and Vornado Realty Trust to give employees the $470 million the firms received in interest and fees from Toys ‘R Us . The employees would get more than $15,000 each under the plan, which has 50,000 signatures.

Other employees have even appeared before Congress .

Some employees worked at Toys ‘R’ us for decades. We attempted to speak to several employees at stores across the country. All declined to comment because they are finishing their final days at the stores or are hoping for severance.

Toys ‘R’ Us told BuzzFeed it gave employees 60 days’ notice that their jobs were ending, which is required under federal law. 

“We are also doing whatever we can to help employees transition, including job fairs and connecting them to resources available in the various local markets,” Toys ‘R’ Us disclosed to BuzzFeed .

Still, Toys ‘R’ Us employees should face only short-term turmoil as they re-enter a labor market in which jobs are plentiful and wages rising.

“There are more job openings right now than there ever have been, record numbers of job openings,” Economist Robert Kleinhenz said. “This is as good a time as any for them to be out there looking for work.”

 

A silver lining for some?

For every ounce of pain that flows from Toys ‘R’ Us’ demise, there is opportunity ahead for its rivals.

“Anytime there's a disruption, we have the ability to be able to take advantage of it,” said Mark Butler, co-founder and CEO of Ollie’s Bargain Outlet Holdings Inc., based in Harrisburg, Pennsylvania.

In an April 4 earnings call, Butler said his company, which has 275 locations in 21 states, will look for deals on real estate, merchandise and maybe even some new employees in what’s left of Toys ‘R’ Us.

Toys are “a meaningful portion of our business, and it excites the consumer,” Butler said. “We think there's going to be a lot of product available.”

Ollie’s isn’t the only retailer hunting for deals. Macy’s, Michael’s, The Children’s Place and Five Below all told analysts in the last few weeks that they’ll be able to capitalize from the toy store’s bankruptcy. 

Then there are the small “mom and pop” toy stores and smaller chains. 

"No one wants to see a business close -- whether it's Toys ‘R’ Us or whether it’s a small business. It's not good for the economy,” said Brian Miller, president of Geppetto’s a chain of 10 toy stores in San Diego. “but with the demise of Toys ‘R’ Us there's a great demand for toys.”

 
Will small chains benefit?

Kleinhenz, the economist, said these opportunities are one reason the collapse of Toys ‘R’ Us will do no permanent damage to the U.S. economy. 

Other silver linings include a strong job market, rising demand for commercial real estate and steady consumer appetite for new toys.

“All of this is happening against the backdrop of an economy that’s doing quite well,” said Kleinhenz, executive director of research at Beacon Economics, LLC. “So there are opportunities out there to offset the losses that a vendor or a creditor might be incurring from this.”

Toy industry impact

The toy industry will suffer some short-term losses when a chain that still boasts a 15 to 20 percent market share evaporates over a few weeks. 

Morningstar analyst Jaime Katz downsized revenue and profit estimates for Hasbro and Mattel for 2018, but Katz predicts the liquidation will do no lasting damage.

Still, Jeffries analyst Stephanie Wissink estimated March 9 that 10 to 15 percent of Toys ‘R’ Us sales could vanish forever . The problem is smaller toy companies found easier access from Toys ‘R’ Us than bigger chains such as Walmart, Amazon and Target are likely to provide. That could leave some toy makers with no way to sell their products.

Major retailers such as Walmart and Target also don't have the same amount of shelf space for toys as the Toys ‘R’ Us stores.

"A typical Toys R Us carries about 3,000 more items in-store than a Walmart or Target," Jim Silver, editor in chief of TTPM.com, a toy review site, told the Los Angeles Times

 
Toys R Us liquidation facts

But Johnson Investment Counsel analyst Joe Edelstein said toy companies will eventually figure out how to do without Toys ‘R’ Us.

“The demand for toys will still be about the same,” Edelstein said. “I think the category should grow low single digits going forward. But where those items are sold, whether it’s online or perhaps in some other brick and mortar retailer, I’m quite confident that’s where we’ll see the market share shift.”

Real estate impact

Now that it has opted for liquidation, Toys ‘R’ Us will flood the U.S. real estate market with 23 million square feet of vacant space. 

Trepp LLC, a New York firm that tracks real estate financing deals, said Toys R Us has 92 stores in retail centers that owe $4.4 billion to bond investors, including a $7.15 million loan to Turfway Commons in Florence, Kentucky. 

Toys ‘R’ Us occupies 31 percent of the Turfway Commons shopping center’s space with a lease that wasn’t set to expire until 2022, according to Trepp. IRC Retail Centers, which owns Turfway Commons just outside of Cincinnati, wouldn’t comment on its plans for the space.

But Chang, from commercial real estate firm Marcus & Millichap, said retail demand is strong enough in the Cincinnati region for shopping centers to quickly replace the 230,000 square feet occupied by Toys ‘R’ Us and Babies ‘R’ Us stores. 

Some store locations will be claimed faster than others, Chang said, but there will be plenty of fitness centers, restaurants and growing retailers interested in the bargains an empty store offers.

“A weak retailer in a retail center doesn’t do anybody any good,” Chang said. “If it’s not generating traffic and sales and you replace it with something more dynamic, that entire retail area will do better.”

Structural change

Which brings us to some of the less tangible impacts of this toy story with a sad ending. 

Toys ‘R’ Us is a high-profile example of two troubling trends: Retailers struggling with debt and private-equity deals in danger of collapse. 

The New York Times reported March 16 that Toys ‘R’ Us is the latest in “a wave of buyouts” in trouble, including iHeartMedia, a radio company that filed for bankruptcy in March and the Winn-Dixie supermarket chain, which is trying to restructure its debt.

Kleinhenz said the trend could make it harder for all retailers to finance new growth initiatives and slow down the pipeline for new mergers and acquisitions.

“Lenders are going to tread very carefully when it comes to offering debt financing to retailers,” Kleinhenz said. “Certainly, if they’re going to grow, they’ve got to grow with a very thoughtful plan in order to get financing. If they’re going through acquisitions in a market that’s already declining, then I think any lender is going to be looking with some suspicion at that marketing plan because we’ve seen this happen before and now the Toys ‘R’ Us liquidation is just the most recent one.”

 
The history of Toys R Us

Kleinhenz sees the liquidation as part of a larger structural change in the economy that’s irreversible: Digital retail has forever changed the way consumers interact with stores, brands, products and services.

“There are more opportunities than ever before with the growth of online opportunities,” he said. “I can get all sorts of information about the products or services that I may choose to buy by simply sitting at my kitchen table, opening up my laptop and doing a search. I never have to hop in the car and drive around. The costs associated with getting information before I shop have plummeted because of the Internet. That’s a huge advantage as a consumer and looking at it through the eyes of an economist.”

But for consumers like Edwards and her daughter that shopping experience will never quite be the same as walking into a Toys ‘R’ Us.

“I think this is like the biggest closing ever,” Edwards said. “When it comes to Christmas and holidays and experience, generation after generation, Toys ‘R’ Us is everything.”

This in-depth look at Toys 'R' Us was reported and assembled by E.W. Scripps journalists in Cincinnati, Denver, Detroit, Fort Myers and San Diego.