What's going on?
Toys R Us, one of the only big retailers focused exclusively on toys, looks like it’s shutting down its operations on both sides of the Atlantic – which means toy manufacturers like Hasbro and Mattel will lose an important sales channel.
What does this mean?
News leaked last week that Toys R Us was preparing to completely shut down its US operations, and on Wednesday it confirmed that its UK operations would close. Late last year, Toys R Us, which had a lot of debt, entered a voluntary process aimed at striking a deal with its lenders in order to stay afloat. The hope was that the business could be turned around; but its lenders couldn’t agree on a deal and a new buyer failed to materialize, meaning its revels now are ended.
Why should I care?
For markets: Toy manufacturers are losing a key distributor.
Toys R Us accounted for 15-20% of US toy sales last year (tweet this), according to investment bank Jefferies. The worry is that without a dedicated major chain selling their wares, toymakers like Mattel and Hasbro will have to fight with other products to attract customers at more varied retailers (like Walmart and Amazon). The end result could mean fewer Barbies and Nerf guns get sold – which is why the stock prices of both Mattel (-c.12%) and Hasbro (-c.6%) have taken a tumble since the news broke.
The bigger picture: Debt is dangerous.
Toys R Us was bought by a consortium of investment firms back in 2005. Those firms encouraged the retailer to load up on debt, which can boost profits. But debt isn’t free: Toys R Us got bogged down using income to pay interest on its loans, instead of investing in things like an online platform that would have at least allowed it to try to compete with Amazon. Ultimately, the huge debt pile buried the toy store, leaving its shareholders holding empty boxes.