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Toys R Us: Comeback Kid, or Kid Who Shouldn’t Have Come Back?

When Toys R Us announced the decision to close all North American stores in March 2018, the effects were cross-generational.  From the young who lost a space “where a kid can be a kid,” to the old for whom the event triggered a sense of nostalgia, the Toys R Us closing had an acute impact across the country.  To those following the retail market, however, the bankruptcy and liquidation came as no surprise: Toys R Us had amassed a stupendous amount of debt, with its debt-to-equity ratio at over three-to-one.  The company had also failed to adapt its sales strategy in the face of Goliath-sized competition from Amazon and Walmart.  Hammering the last nail in the coffin, Toys R Us failed to seek legal advice on bankruptcy until September 2017, when it was likely too late to save the company.  They filed bankruptcy that same month, and the store closing announcement came only six months later.  The company’s mistakes were basic, even pushing lawmakers to question whether the amassing of debt was not a deliberate strategy for private equity firms to capitalize on the bankruptcy.  It could be, however, that Toys R Us simply went the way of big box retail everywhere: falling prey to the unbeatable prices and convenience of its online and discount retailer competition.

In the summer of 2018, the company announced that it would be returning to the brick-and-mortar toy retail market, giving many cause for celebration.  However, there is one group who still feel the sting of that March 2018 liquidation announcement: The company’s former employees, who were laid off without severance pay when the company closed its doors.  While the workers are able to make a claim for the pay during the reorganization proceedings, they are last in a long line of creditors and there is a chance they will walk away with little to nothing.  However, if Toys R Us chooses to put together a compensation package for the ousted workers, as it has hinted, it could change the way things are done in private equity retail bankruptcies.

I. Victims of a Changing Market, or Basic Mistakes?

The Toys R Us woes can be boiled down to three factors compounding upon each other: unwieldy debt, unbeatable competition, and unwillingness to adapt.  Throughout the 1990s, Toys R Us failed to grow while its competitors took up increasingly larger portions of the market share.1 In 1999, Toys R Us lost its place as the country’s top toy retailer, falling behind Walmart.2

Toys R Us tried but failed to adapt at the time.  While the company launched a website and began accepting online orders like its competition, their failure to fully embrace the web was evident. 3  In 2002, Toys R Us settled a lawsuit alleging that the company accepted online orders for Christmas 1999 knowing that it could not fulfill them on time. 4  Its subsequent efforts to adapt to the web were short-sighted and resulted in Toys R Us’ exclusion from the dotcom boom.  In 2000, Toys R Us and Amazon entered a ten-year deal making Toys R Us the only toy retailer on Amazon. 5  Visiting the Toys R Us website would redirect users to Amazon. 6  This effort to take a shortcut into the online world backfired when Toys R Us was unable to keep enough inventory to meet Amazon customer demands. 7  As a result, Amazon breached the agreement in 2004 and Toys R Us was left to fend for itself in the world of the web, entering the online game much later than its competition. 8

In a sense, Amazon acted as a disruptor company vis-à-vis Toys R Us (and, of course, many other unlucky brick-and-mortar retailers).  By introducing innovative products or services that fundamentally change the way people live, disruptor companies eat up huge portions of market shares. 9  Disruptor companies introduce convenience, accessibility, and affordability into markets, and often at lower costs than existing competition. 10  They can thereby be fatal to other companies, particularly those which fail to adapt in response to the new, innovative competition through advances of their own.  11  Often, larger, more established companies fall even harder in the face of market disruptors exactly because of their entrenched structures. 12  The strict, multi-layered bureaucratic systems present in many large companies can make innovation difficult and even unlikely. 13  Senior executives tend to be risk-averse, preferring to keep a public sheen of success.  14  And, large companies often fail to empower employees to cultivate new ideas, focusing instead on maintaining the status quo. 15  Even more fatal, older companies often ignore market disruptors, perhaps exhibiting what behavioral economists would characterize as over confidence.16  Even old companies which attempt to innovate tend to do it faster than customers’ needs evolve, offering products and services that are more sophisticated, expensive, and complex than customers are looking for. 17

Here, the Toys R Us unraveling began in large part because it made only half-hearted efforts to respond to Amazon’s dotcom disruption.18  Instead of using the internet to innovate on its own, Toys R Us relied on Amazon in the ten-year collaboration which, even absent Amazon’s breach, was a short-sighted deal: What would Toys R Us have done if Amazon refused to renew the deal after ten years?  Incidentally, Amazon would have had ample incentive to refuse to renew considering its meteoric growth across markets.  Toys R Us did not set up its own website until two years after the collaboration turned sour, in 2006. 19  Even with its own website set up, Toys R Us continued to ignore the signs of change in the retail market and focused its efforts in-store. 20  The company did not hire its first Chief Technology Officer until 2016.21  It was in 2017, mere months before declaring bankruptcy, that Toys R Us realized the need to revamp its web presence.22  The revamp was just a basic catch-up to where other companies had been for years: Category filters, two-step checkout (in place of the whopping five steps the website previously required), and sale alerts. 23  When announcing the revamp, Toys R Us CEO David Brandon admitted that when it came to recognizing customer demands in the purchasing process, “[i]t probably took us a while.” 24  While Toys R Us continuously failed to adapt, Amazon raked in toy profits and became a cross-market force to be reckoned with.  At the same time, Target and Walmart took up online presences and became serious threats to Toys R Us in the baby and toy markets.25

To say that Toys R Us was simply a victim of a changing market ignores the company’s utter failure to adapt in the face of clear signs of those changes.  Comparing Toys R Us to Walmart is illustrative.  Walmart’s wide range of offerings, including grocery and household essentials, gave the company some cushion from Amazon’s growth until 2010, when Amazon began an aggressive foray into selling household staples.26  Amazon even attempted another disruption against Walmart by allowing customers to subscribe to items they want to receive regularly.27  Instead of maintaining the status quo and confining itself to brick-and-mortar, Walmart adapted and launched an aggressive online campaign of its own.28  Walmart matched Amazon’s thrust, offering fast shipping and putting its e-commerce division on equal footing with its other divisions. 29  Amazon continues to outstrip Walmart online, but Walmart is notable for recognizing where the industry was going, and adapting to match. 30  Toys R Us did not have such foresight, and its growth was further impeded for it.

As Toys R Us struggled to adapt to market changes, its debt compounded. In January 2005, Toys R Us debt was downgraded to junk bond status. 31  Later that year, two private equity firms, Bain Capital and KKR, and Vornado Realty Trust acquired Toys R Us in a leveraged buyout and took the company private. 32  After the $6.6 billion purchase, Toys R Us was left with $5.3 billion in debt, which it never recovered from. 33  The company immediately amassed $3 billion in new debt, forcing it to pledge 97% of operating profits to pay interest. 34  Store closings began immediately after the 2005 leveraged buyout.35  In the years following, Toys R Us struggled to pay back debt, which at the time of bankruptcy totaled over $5 billion. 36  These troubles were compounded by the fact that Amazon, Target, and Walmart dwarfed Toys R Us in toy sales in the years leading up to the bankruptcy announcement.37  By the time Toys R Us declared bankruptcy in September 2017, it had about $5 billion in debt and was spending $400 million a year just to service annual interest on that debt, leaving few resources for employee salaries and store upkeep. 38

II. More Missteps: Failed Bankruptcy Efforts

At the outset, Toys R Us hoped that filing bankruptcy would allow it to invest $65 million in its stores and reposition itself competitively for the future. 39  By March 2018, about six months after its initial bankruptcy filing, Toys R Us was announcing its decision to close its United States operations entirely.40  Between the bankruptcy and its failure, Toys R Us made disastrous moves that spelled its impending doom, starting with the timing of the filing itself.  41

The Toys R Us bankruptcy filing came immediately before the holiday toy-buying season, which normally accounted for about half of the company’s revenue annually, because suppliers began tightening product terms to ward off losses amid rumors of Toys R Us’ struggles.42  In previous years, Toys R Us consistently priced its toys higher than competitors during the holidays, with a strategy of being buyers’ last resort when lower-priced competitors ran out of stock and these last-minute shoppers feared that online orders would not be delivered in time.  43  This year, however, the company’s competition smelled blood. Walmart, Target, and Amazon regularly used low prices to undercut competition like Toys R Us and, unlike Toys R Us, could use toys as loss leaders to lure customers into stores and websites during the holiday season. 44  This year, Walmart, Target, and Amazon offered even deeper discounts during the 2017 holiday season, providing a proverbial nail in the Toys R Us coffin. 45  In addition, the Toys R Us strategy of being the last resort stop for shoppers backfired because a general decline in toy sales meant that its competitors retained enough inventory to serve customers for the entire holiday season. 46  And, more reliable same-day and two-day delivery guarantees from competitors meant that shoppers could buy online with confidence of on-time delivery, so would not have to go to Toys R Us even at the last minute. 47  Moreover, the Chapter 11 filing meant that many customers avoided purchasing Toys R Us gift cards during the holidays. 48

Finally, vendor uncertainty that Toys R Us would make promised payments was compounded by the Chapter 11 filing, causing a death spiral that resulted in delays and disruptions in product supplies during the bankruptcy. 49  In the backdrop of these holiday failures, the Toys R Us debt appeared even more insurmountable after the low holiday sales.  Toys R Us began announcing store closings in January 2018, with little money left to operate the remaining stores. 50.  Attorneys for Toys R Us asserted that the company would be out of cash by May 2018, and lenders determined that the best way to maximize their recovery was to liquidate inventory in the remaining United States Toys R Us stores. 51  The company’s efforts to save itself by finding a buyer failed, and liquidation became its only option. 52  Toys R Us terminated all employees without severance pay and closed its doors in March 2018. 53

III. Up Next: A Bitter Resurgence

In early October 2018, Geoffrey the Giraffe shocked the world again when Toys R Us indicated that the company would be making a comeback in the United States market. 54  The lenders that took control of Toys R Us are heading the effort to revive the company, in opposition to their announced plan to auction off the company’s intellectual property, because bids for the assets “were not reasonably likely to yield a superior alternative.” 55  This means that Toys R Us can reopen free of the debt and operational costs that crippled it for over a decade. 56  And, hopefully, this will give the company a chance to learn from its past mistakes.

There was at least one group that was not smiling when Toys R Us announced that the brand was making a comeback: the company’s former employees, who were laid off without severance pay. 57  The 33,000 former Toys R Us employees claim to be owed $75 million in severance pay.  58  While Bain Capital and KKR have promised to designate a fund for former employees, they have not released details on the size of this supposed fund.59  The Wall Street Journal reported that the fund would hold $20 million, an amount which pales in comparison to the $75 million the workers claim. 60

As of now, it is still unclear whether the former employees can expect to receive any severance pay and, if so, how much.  What is more, the status of employment contracts can be somewhat ambiguous when a business is under a bankruptcy court’s control.  61  The Bankruptcy Code gives third priority to unsecured claims for wages, salaries, and commissions, including severance pay earned within 90 days before the bankruptcy filing or cessation of the debtor’s business. 62  However, such recovery under the Bankruptcy Code is limited to $2000 per individual. 63  In the case of Toys R Us, the company had guaranteed its workers two weeks of severance for their first year of service, and one week of severance for every two years of work after that. 64  For the company’s long-time former employees, this could certainly equate to far more than this $2000 cap.

The company can, of course, create its own scheme of payment which surpasses this cap, which may be what Bain Capital and KKR are aiming for with the supposed $20 million fund.  While the purported fund is significantly less than the $75 million the former employees are claiming, the fund represents what may be a new precedent for private equity-backed companies that file for bankruptcy. 65  This is particularly big news for the retail industry, where leveraged buyouts and bankruptcies are common, but dedicated funds for employees are not.  66  Given employees’ third priority in bankruptcy claims and the Bankruptcy Code’s $2000 cap, the firms’ fund is likely the employees’ best shot at recouping a portion of the lost severance.  The bankruptcy process has given Toys R Us the chance to modernize, rebuild, and learn from past mistakes – and perhaps this severance package, which is unusual in the industry, is a sign of the new Toys R Us’ ability to innovate and adapt to its surroundings.

  1. Toys ‘R’ Us Inc Chronology, Business Insights: Global,

  2. Id. 

  3. Id. 

  4. Id. 

  5. See Parmy Olson, How Toys ‘R’ Us Neglected the Web, Forbes, (Sept. 19, 2017, 10AM),

  6. Id. 

  7. Id. 

  8. Chronology, supra note 1. 

  9. Roman Stanek, Why It’s Important to Make Your Company the Disruptor, Not the Disrupted, Forbes (June 4, 2018, 8:15AM),

  10. Magda Wierzycka, What is a Market Disruptor?, Moneyweb (June 29, 2016, 10:22AM), 

  11. Stanek, supra note 9. 

  12. Id. 

  13. Id. 

  14. See Michael Meier, How Risk Aversion Motivates Executives, KelloggInsight: Finance and Accounting (March 8, 2017),

  15. Stanek, supra note 9. 

  16. Wierzycka, supra, note 10; Ulrike Malmendier & Timothy Talyor, On the Verges of Overconfidence, 29 Berkeley J. Econ. Persp. 3, 3-4 (2015). 

  17. Wierzycka, supra note 10. 

  18. See Olson, supra note 5. 

  19. Id. 

  20. Charisse Jones, Toys R Us Finally Gets Serious About E-Commerce, USA TODAY (May 8, 2017, 12:03AM),

  21. Press Release, Toys R Us, Lance Wills Joins Toys R Us Inc. As Company’s First Executive Vice President, Global Chief Technology Officer (May 23, 2016),  

  22. Jones, supra note 20.  

  23. Id. 

  24. Id. 

  25. Id. 

  26. See Farhad Manjoo, Walmart’s Evolution from Big Box Giant to E-Commerce Innovator, Fast Company (Nov. 26, 2012), 

  27. See id. 

  28. See id. 

  29. Id. 

  30. See id; Ingrid Lunden, Amazon’s Share of the US E-Commerce Market is Now 49%, or 5% of all Retail Spend, Tech Crunch (July 2018),  

  31. Chris Isidore, Amazon Didn’t Kill Toys ‘R’ Us. Here’s What Did, CNN (Mar. 15, 2018, 7:01AM),  

  32. Froma Harrop, Toys R Us Shows How Private-Equity Companies Operate, The Columbian (Oct. 21, 2018), 

  33. Isidore, supra note 31.  

  34. Harrop, supra note 32.  

  35. Chronology, supra note 1. 

  36. Michael Corkery, Toys ‘R’ Us Files for Bankruptcy, Crippled by Competition and Debt, New York Times (Sept. 19, 2017), 

  37. See id. 

  38. Isidore, supra note 31. 

  39. See id; Ben Unglesbee, One Year Later: Toys R Us’ Fatal Journey Through Chapter 11, Retail Dive (Sept. 18, 2018), 

  40. See Isidore, supra note 31. 

  41. Unglesbee, supra note 39. 

  42. See id; Nathan Bomey, 5 Reasons Toys R Us Failed to Survive Bankruptcy, USA TODAY (Mar. 18, 2018, 1:35PM),

  43. See Bomey, supra note 42. 

  44. See Unglesbee, supra 39. 

  45. See Bomey, supra note 42. 

  46. Id. 

  47. Id. 

  48. See Unglesbee, supra note 39. 

  49. See Bomey, supra note 42. 

  50. Unglesbee, supra note 39. 

  51. Id. 

  52. Id. 

  53. Id. 

  54. See Rachel Siegel, Toys R Us Brings Back Geoffrey the Giraffe – And its Laid Off Employees are Furious, The Washington Post (Oct. 8, 2018),

  55. Toys ‘R’ Us Lenders Planning to Revive Brand and Reopen Stores, Fortune (Oct. 2, 2018),

  56. Id. 

  57. See Ahba Bhattarai, Toys R Us Owners Set Aside Millions of Dollars for Laid-Off Workers After Bankruptcy, The Washington Post (Oct. 1, 2018),

  58. See Siegel, supra note 54. 

  59. Id. 

  60. Id. 

  61. Stacey J. Jendrickson, The Priority of Severance pay Claims Under the Bankruptcy Reform Act, 3 Berkeley J. Emp. & Lab. L., 566, 566 (1979). 

  62. Id. 

  63. Id. 

  64. See Bhattarai, supra note 57. 

  65. Id. 

  66. Id. 

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Sahar Adora

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