Toys ‘R’ Us Brand Owners Face Uphill Fight

October 4, 2018

By Lillian Rizzo | The Wall Street Journal

The new owners of Toys “R” Us brand are hoping the toy seller’s spin through bankruptcy will allow the tarnished-but-beloved brand to succeed in a depressed retail environment, and reap long-term return.

The new owners—the same group of hedge funds that pulled the plug on Toys “R” Us’s reorganization this year—are slated to become the owners of everything from the Toys “R” Us and Babies “R” Us names to the rights of company mascot Geoffrey the Giraffe and other licensed brands such as Imaginarium.

The new ownership group, lenders who own a big chunk of Toys secured debt, is made up of about 10 hedge funds, most prominently among them Solus Alternative Asset Management, Angelo Gordon and Franklin Mutual Advisers. Snow Park Capital Partners is a holder of a smaller position, court papers show.

The hedge funds are betting that Toys “R” Us will have a future brighter than the market expects. Instead of unloading the brand at a bargain price in a down market, the owners are hoping to reboot Toys “R” Us stores with the hope of ultimately reaping a higher recovery somewhere down the line, people familiar with the matter said.

“The Toys ‘R’ Us bankruptcy created a significant, perhaps even unanticipated, void in the industry for both consumers and the supply chain,” said Jeffrey Pierce, managing partner of Snow Park. “But if the proposed reorganization plan moves forward, that void can be filled in a way that creates new opportunities for former employees, manufacturers and the brand.”

Representatives for Toys “R” Us, Solus, Angelo Gordon and Franklin declined to comment Thursday. Solus, through its spokesman, has denied playing any role in the demise and liquidation of the retailer.

Earlier this week, the Toys bankruptcy estate said it had canceled a court-approved sale process after determining that an auction of the brands wouldn’t “yield a superior alternative to the plan.”

The lenders had been prepared for some time to take ownership of the brand if they were unable to receive higher competing offers, people familiar with the matter said. In August, the lender group had said it was “prepared to consider, at the right price,” the acquisition of the retailer’s brand name and other intellectual property assets.

The sticking point was the price. Since hitting the auction block earlier this year, potential buyers had valued Toys “R” Us’s intellectual property in the range of $150 million to $200 million, and many of the bids the company eventually received were close to $200 million, according to the people familiar with the matter.

The lending group, which has been in control of the intellectual property for some months now, had been looking for offers north of $200 million, the people said.

While Toys “R” Us’s leaders have yet to publicly say how they will “revitalize” the brand, the company said this week that “the new owners are actively working with potential partners to develop ideas for new Toys ‘R’ Us and Babies ‘R’ Us stores in the United States and abroad.”

The ownership group and its advisers have been in discussions regarding possible investment ideas and licensing partnerships, people familiar with the matter said. However, the timing of when the venture will start up hasn’t been revealed yet.

Toys “R” Us’ bankruptcy process has left the brand’s owners facing an uphill battle to fix the reputational damage done to its brand name and supplier relationships.

The company’s liquidation left many toy suppliers holding the bag for hundreds of millions of dollars in toys and other goods shipped to Toys “R” Us stores up until its liquidation. Although a settlement was ultimately reached—vendors recovered about 22 cents on the dollar—the suppliers lost at least $350 million from retailer’s demise, court papers show.

“Vendors were burned, the scar tissue is still quite raw and I think there’s going to be a sensitivity at some level about re-engaging, unless there’s very clear boundaries and restrictions,” such as tighter trade credit terms, said Stephanie Wissink, a toy analyst at Jefferies.

For many retailers, Toys “R” Us in particular, the fourth quarter remains its most important financial period as it reaps most sales from holiday shoppers. Skipping the coming holiday season, and allowing suppliers to rely on competitors, could make it more difficult to justify doing business with Toys “R” Us again, according to retail experts.

It was Toys “R” Us’s dismal holiday sales that led to the unraveling of the retailer last winter, and the ultimate decision by its lenders to forgo a reorganization in favor of a liquidation.

“Does this change the dynamic for this holiday season? No. The allocation by toy suppliers has been marked, and most are proceeding with the holiday season as if there’s no Toys ‘R’ Us,” Ms. Wissink said. Toy suppliers will likely be filling the shelves of Amazon.com Inc., Walmart Inc., and Target Corp. to make up for the loss of Toys “R” Us, she said.

But given the hole left by the retailer’s demise, other industry experts say that a reimagined Toys “R” Us—with a major online presence and stores in the form of seasonal pop-ups or stores-within-stores—would eventually be welcomed back in the marketplace.

“What we’ve seen in other retail bankruptcies where brand vendors were abused with low to no recoveries, they are being supportive because their alternatives are as bad as the recovery is from Toys ‘R’ Us,” said Burt Flickinger of Strategic Resource Group, a global consumer industry consulting firm. “They’ll have much better gross margins than letting an unchecked Amazon take over.”