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Analysts Comment on Toys 'R' Us US Bankruptcy Filing

Matt Hudak Profile Picture
Matt Hudak Bio
Tim Barrett Profile Picture
Tim Barrett Bio

Tim Barrett, Senior Retailing Analyst:

I’m not surprised by the fact that Toys 'R' Us filed for bankruptcy as these rumors have been circulating for the past week and its troubles in adapting to the post-recessionary economy were well documented. Abroad, it has found relatively more success, but it has been hamstrung by exchange rates which are exacerbating declines in foreign countries like Japan and the UK and even reversing growth in others like France and Canada.

The company has been saddled with debt repayment obligations for years, making it unable to make necessary improvements to its in-store experience and its e-commerce strategy. Despite the need to belt tighten, the company clearly opted to use store openings to try and increase its absolute sales on a year-by-year basis. This strategy did not work. From 2011-2016, the company opened many new stores in new formats, but these were unable to make an appreciable change in overall sales. These new stores may have limited some downside risk, but not nearly enough to make the experiment worthwhile. Even worse, the focus on these new store formats resulted in too little investment in making e-commerce a main channel.

Matthew Hudak, Senior Toys and Games Analyst:

From the standpoint of what they sell in the toys and games market they have a lot of issues being able to capitalize on toy trends. First, their video game area of the store will be a drag, as the video game market has become heavily digitized with a lot of sales going on through downloads, with remaining physical sales being made online, especially with deals like Amazon’s 20% off pre-order games for prime.

Second, they are heavily centered around developed markets, where there has been high growth in STEM or robotic products. But these products are pretty expensive and tend to be sold to parents who tend to do a lot of research on the toys they buy for their kids and end up buying online. In addition, there is a growing amount of sales being made to adults in developed markets, especially in hobby board games or high end collectable toys. This group, however, would not go to Toys 'R' Us for their purchases and would instead look online or in local specialty shops.

Finally one other major toy trend is the growth in small price end aisle toys, like collectable blind packs. This is something that is a convenience driven purchase and can be purchased in numerous locals, not just hypermarkets like Target or Walmart, but a lot of other smaller stores, lessening the need to go to Toys 'R' Us to pick up gifts for children.

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