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Toys 'R' Us calls it quits after reorganization efforts fail

Business bankruptcies generally do not evoke an emotional response from anyone other than the company's shareholders and employees. A rare exception to that rule is the reaction to the recent announcement by toy retailer Toys 'R' Us that it will close all of its 740 stores in the United States over the next few months. The announcement was greeted with sadness and a sense of loss by the millions of adults who remember spending their childhoods wandering through the aisles of their favorite Toys 'R' Us store. The causes of this large commercial bankruptcy provide powerful warning signs for other big box retailers.

Toys 'R' Us announced in September 2017 that it planned to file for protection from its creditors under Chapter 11 and attempt to reorganize its massive debt load. The chain then proceeded to have miserable sales during the normally profitable holiday shopping season. The disappointing sales were blamed on customer jitteriness over whether the chain would be able to fulfill orders and accept returns. The company admitted that it had difficulty matching prices with Amazon and other online retailers. Also, the increasing popularity of mobile devices reduced the demand for other kinds of toys.

Perhaps the biggest barrier to the company's return to health is its massive debt. The company was purchased by three equity capital firms in 2005 in a leveraged buy-out that necessitated the borrowing of $6.6 billion. The three investors had planned to take the public again as soon as the debt load was reduced. That plan was stymied by the company's declining sales. The debt load also robbed the company of necessary flexibility to invest in its business operations.

The sad tale of Toys 'R' Us shows how even the most experienced businessmen can make bad choices about business strategy. No business owner is exempt from the effect of mistaken projections, changing markets and unexpected business reverses. Anyone whose business is suffering from such mishaps may wish to consult an experienced bankruptcy attorney for advice on whether and how a bankruptcy may solve both immediate and long-term problems.

Source: WSMV.com, "Toys R Us will close all US stores," George DuMontier, Mar. 14, 2018

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