United States: Is This The End For Geoffrey The Giraffe? Toys "R" Us Seeks Chapter 11

On September 18, Toys "R" Us filed a chapter 11 petition in the United States Bankruptcy Court for the Eastern District of Virginia; it also filed for bankruptcy protection for its Canadian operations. Readers may wonder: is the toy business in trouble? Not at all; according to data from the Toy Industry Association, U.S. toy sales are expected to increase 4.5% this year, with sales estimated to reach $21.3 billion. If the industry hits that number, it will be at least the fifth straight year of sales growth, as shown in the chart below:

Source: Toy Industry Association

Since its beginnings as a baby furniture store in 1948, Toys "R" Us has grown into a leading retail brand dedicated exclusively to kids, toys, and games. Toys "R" Us claims to be the world's leading toy chain, with approximately 1,600 stores in 49 states and 38 countries that it operates under the Toys "R" Us, Babies "R" Us, Toys "R" Us Outlet, and Toys "R" Us Express brand names. Toys "R" Us claims it has the highest brand recognition in the world among children.

Toys "R" Us Faces Challenges

So what's behind the woes of Toys "R" Us? The biggest story in retail this year is the continuing weakness of bricks-and-mortar stores. In a report issued in May, Credit Suisse estimated that 2017 will set a dubious record with the highest number of store closures ever recorded, with an estimated 9,600 stores expected to go dark by year-end, a number that did not include any store closings by Toys "R" Us. And while Toys "R" Us said that it did not anticipate store closings in the press release that announced its Chapter 11 filing, nearly all retailers that file for bankruptcy end up closing stores, in part because Chapter 11 gives management the opportunity to reject leases for unprofitable stores. Given the large number of stores Toys "R" Us operates, it is likely that there are some weak performers in the mix, so it is probable that Toys "R" Us will shrink its U.S. and Canadian footprint while in bankruptcy.

Toys "R" Us is also suffering from a changing retail marketplace. While Toys "R" Us ruled the toy business from the late 1970s through the 1990s, the last few years have been more difficult. Large retailers, such as Walmart and Target, have increased the depth of their toy business, leading to increased competition from other retailers who previously did not sell or concentrate on toys. But the real driver for change is the rise of e-commerce. Published reports say that e-commerce sales now represent 25% of U.S. toy sales, a percentage that keeps increasing as e-commerce grows its share of total retail sales. Analysts estimate that Amazon alone represents nearly 9% of all toy sales. When Toys "R" Us was in its heyday, the Internet didn't exist and Amazon only sold books.

But the immediate cause of the Chapter 11 filing was a crisis of confidence on the part of the company's trade vendors, which historically has been a risk for retailers, particularly as they build inventory levels for the holiday season. According to Toys "R" Us, in August it began negotiations with a group of its junior secured lenders regarding debt service relief. In its bankruptcy papers, Toys "R" Us acknowledged it sought "a holistic reorganization," rather than getting the "Band Aid" relief it had previously obtained when facing debt maturities. In connection with that effort, it hired experienced restructuring attorneys and financial advisors. But when those discussions broadened to include the possibility of the junior lenders providing financing for a Chapter 11 case, the news leaked, and identified the new bankruptcy advisors. On September 6, the business press pounced on the fact that Toys "R" Us was considering Chapter 11, which soon became a self-fulfilling prophecy. According to the company, the reaction among the vendor community was swift and brutal: within a week nearly 40% of its trade vendors put the company on COD status and many factors and credit insurers withdrew support. Prior to this crisis, Toys "R" Us had experienced an historic average of 60 days of trade credit support; the new terms would have required an immediate infusion of up to $1 billion in new cash, money that Toys "R" Us neither had nor could obtain.

In its Chapter 11 filing, Toys "R" Us also acknowledged that it is struggling under the debt load it took on when it was acquired by a group of private investors in 2005. In that deal, a group comprised of Bain Capital Private Equity, LP, Kohlberg Kravis Roberts & Co. L.P., and Vornado Realty Trust purchased Toys "R" Us in a $6.6 billion deal, which resulted in the company taking on $5.3 billion in secured debt. In papers filed with the Bankruptcy Court, Toys "R" Us chief executive David Brandon admitted that the debt service obligations have harmed company's ability to compete: "As a result, the Company has fallen behind some of its primary competitors on various fronts, including with regard to general upkeep and the condition of our stores, our inability to provide expedited shipping options, and our lack of a subscription-based failed to capitalize on the iconic Toys "R" Us brand and its unique position as a one-stop shop for toys every day year round."

Although it admitted that its business needs to be rejuvenated, in its Chapter 11 filing, the company did not suggest that it would be liquidating, shrinking or selling its business. Rather, it hopes to use "hundreds of millions of dollars" from a proposed new $3.1 billion debtor-in-possession lending facility to improve its stores and operations. Nor was there any mention of store closings or withdrawals from unprofitable or less profitable markets. Debtors are often unrealistically optimistic at the start of their bankruptcy cases about what they can achieve in Chapter 11 and the level of goodwill they have banked with their creditors. The long experience of retailers in Chapter 11 suggests that very few of them are able to reorganize; most liquidate or are sold in bankruptcy.1>

Even retailers backed by strong financial sponsors can stumble; a few years ago RadioShack went through a bankruptcy in which it was sold to its largest secured creditor. In its first Chapter 11 filing, Radio Shack closed roughly half its stores and claimed that the remaining stores were all profitable. Less than two years later, it was clear that the first reorganization had failed, and it sought Chapter 11 for the second time. While every case is different, and the Radio Shack experience doesn't necessarily mean that Toys "R" Us will have the same result, it does underscore how difficult it is for retailers to recover from a bankruptcy filing.

Protections for Landlords and Trade Creditors

Given the weakness in the retail sector, what should creditors of retailers do to protect themselves? For landlords, they should review their leases and verify that their tenants are in compliance. If they are not, landlords can use verifiable breaches as a basis for negotiating an improvement in position, such as obtaining a letter of credit for some or all of the remaining lease term or obtaining an additional cash lease deposit. If the retailer does seek bankruptcy protection, the landlord must pay attention to proceedings in the case. Pursuant to section 365(d)(4)(A) of the Bankruptcy Code, a debtor has 120 days within which to assume or reject an unexpired lease. However, the bankruptcy court may extend this initial 120 day period for an additional 90 days "for cause." A landlord who has a potential new user for the space occupied by the debtor, should also consider whether to oppose a debtor's request for additional time in which to assume or reject its leases.

For trade creditors, the issues are more complex and require a higher degree of alertness. As the Toys "R" Us situation demonstrates, a troubled retailer's trade credit can deteriorate very rapidly based on market information or rumors. Under the Uniform Commercial Code, a trade creditor who is concerned about the creditworthiness of its customer has the right to require reasonable assurances of getting paid for its goods. If the creditor makes such a demand and does not receive adequate assurance of payment, it is entitled to stop goods in transit or demand a return of its goods. In addition, creditors selling on purchase orders or open invoices are free at any time to impose new terms, which may include shortening trade terms, requiring cash on delivery, or even payment in advance. There are other alternatives for trade creditors; they can sell their receivables on a no-recourse basis to a factor, or, if the retailer is large enough, obtain credit insurance or purchase a credit default swap. For retailers who seek bankruptcy protection, the Bankruptcy Code provides creditors with an administrative claim for goods shipped to a debtor and received within 20 days prior to the commencement of the bankruptcy case. Of course, before making demands for enhanced credit support, a trade creditor should consider whether cutting off trade credit will actually accelerate a retailer's financial crisis.

The Outlook for Toys "R" Us'

Time will tell whether Toys "R" Us will succeed with its aggressive and optimistic plan to restructure and survive Chapter 11. But the changing nature of the retail marketplace, which has been rocked by a rolling tsunami of retail bankruptcies since the beginning of 2015, shows no signs of stabilizing. As surprising as the news of the Toys "R" Us filing was, there are persistent market rumors that other major retailers may face a similar fate. In light of this turbulence, landlords and suppliers to retailers need to remain vigilant about the financial health of their retail tenants or customers, and be ready to act to protect their interests when necessary.


1For a deeper look at the issues facing the retailing industry, see, Retail Bankruptcy Cases: A Volatile Sector Faces More Turbulence, ABF Journal January\/February 2017, available at http://www.abfjournal.com/%3Fpost_type%3Darticles%26p%3D57582.<\/p>

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions