Toys ‘R’ Us Bankruptcy: From ‘Category Killer’ to Retail Roadkill in 20 Years

Geoffrey Smith

10:11 AM ET

Toys 'R' Us has filed for Chapter 11 bankruptcy protection, the latest and one of the largest victims of the trend to online shopping at the expense of traditional bricks-and-mortar stores. It almost certainly won't be the last.

The filing completes a fall from grace with few parallels in the retail sector. Toys 'R' Us was once so dominant it was referred to as a "category killer", so strong that neither smaller specialists nor department stores could compete with it. But it suffered from the rise both of online shopping, notably Amazon.com, and the rise of big discount stores such as Walmart and Target.

Fatally, it was saddled with billions of dollars in debt through a buyout in 2005 by private equity firms KKR LP and Bain Capital LP, even though its decline was well established by then. After a brief upturn following the deal, sales have fallen every year since 2012.

The company actually made two filings – one for the U.S. and another for its operations in Canada. These account for all but 255 of its 1,600 stores worldwide. International operations won't be affected, according to the company's press release. It also said that its loyalty programs, including the Rewards“R”Us, Geoffrey’s Birthday List and Babies“R”Us Registry, will continue as normal.

Customers who were thinking of buying something from the store don't need to be too alarmed: it has agreed $3 billion of so-called "debtor-in-possession" financing from a syndicate of banks led by JPMorgan that will allow it to keep operating while it restructures a $5 billion debt burden. Among those likely to lose money are holders of the company's $400 million bond that is due next year. That was quoted as low as 18c on the dollar late Monday, according to Bloomberg. Another $1.7 billion in debt falls due in 2019, according to CNBC.

"Today marks the dawn of a new era at Toys 'R' Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way," said Dave Brandon, Toys 'R' Us chairman and CEO, in a statement.

Suppliers such as Mattel and Hasbro may also be hit. The Wall Street Journal reported Tuesday that those two companies are named in the bankruptcy filing as two of its biggest unsecured lenders. Mattel is owed $135 million for goods it has supplied, while Hasbro is owed $59 million. The shares of both companies fell sharply Monday on perceptions that their holiday season,which typically accounts for over 40% of annual sales, could be ruined by the failure of one of their most important sales channels. Mattel fell by 6.3%, Hasbro by 1.7%, and have opened little changed in New York on Tuesday.