After scrambling to keep its bankruptcy reorganization plan alive, Toys R Us is preparing for liquidation, people who weren't authorized to speak publicly about the matter confirmed Thursday.
The toy retailing giant appears to be running out of time, and money — pushing closer to having to close the doors of the entire chain. Its leaders have failed to find a buyer or reach a new debt financing deal with its lenders.
As word spread, shares of Mattel and Hasbro, two of the world's largest toymakers, fell in after-hours trading.
The company in recent weeks has told workers at its going-out-of-business sales that it doesn't have enough money to pay severance. Its United Kingdom division has been placed under administration — the U.K. version of bankruptcy — after falling behind on debt payments. It also reportedly is in talks to sell its Asian European divisions.
A hearing scheduled for bankruptcy court has been postponed three time this week, signaling that the company's reorganization plan could be collapsing.
Sources expect the company to file for Chapter 7 bankruptcy liquidation next week. Toys R Us declined to comment.
Toys still could get a last-minute reprieve if a deep-pocket investor or lender steps up.
Toys R Us failed to pull off the juggling act needed to balance a massive debt load while attempting to upgrade its out-of-date stores and improve its e-commerce offerings.
When Toys R Us filed for bankruptcy protection in September, the company believed that it could emerge from bankruptcy by the fall as a slightly smaller version of itself, with a more manageable debt load.
But after a Christmas season with sales that were far worse than expected, that plan quickly collapsed.
Toys R Us faced the same problems that have pushed other retail chains into bankruptcy. It had too many stores, its stores were too large, and its digital and online offerings lagged far behind the competition.
But it had an additional burden that stacked the deck against it — close to $5 billion in debt resulting from a leveraged buyout in 2005.
That buyout, by private equity investors Bain Capital and KKR, and real estate trust Vornado, saddled Toys with crushing interest payments amounting to $400 million a year, just as the economy was entering its worst downturn since the Great Depression.
Bain, KKR, and the executives they put in place to turn Toys around believed it would be relatively simple to get the retailer in good enough shape to launch a stock offering within three years and reap a healthy return on their investment. They expected they could cut costs and boost sales with more efficient management and better marketing.
But even in years when Toys R Us performed well, the debt payments ate into its profits and kept the company from investing in much need improvements to its stores and its online operations.
When the company filed for bankruptcy protection in September, Chief Executive Dave Brandon promised the bankruptcy court, in his opening declaration, that “Toys R Us is here to stay.” Receiving debtor-in-possession financing and bankruptcy protection, Brandon said, would “ensure the iconic Toys R Us brand stays viable for years to come.”