Toys R Us has asked the court for approval to stop paying its suppliers while it attempts to find buyers for its international business.
The retailer’s plan to liquidate inventory and close or sell its US stores has left vendors wondering where to send merchandise stuck on ships and trucks, and whether their invoices will ever get paid, lawyers said at a court hearing on Thursday.
At the hearing, Toys R Us lawyer Joshua Sussberg said the company was working to avoid any contagion from the US liquidation on the foreign businesses it is trying to sell. Part of that effort means separating the US business from foreign operations to ensure that shipments can reach stores in Canada, Europe and Asia, where the company will be reviewing bid proposals in coming weeks. But lawyers for vendors said they did not know whether they would ever get paid for those goods.
Kenneth Eckstein, a lawyer on behalf of the official committee of unsecured creditors, observed that hundreds of vendors, thousands of employees and millions of customers will suffer: “This is the largest and most rapid deterioration of a retailer and maybe that any Chapter 11 has ever entertained,” he said.
During the hearing, Toys R Us stated that 2017 holiday sales came in well below worst-case estimates, approximately $250m below budget projections. Toys R Us attributed the poor sales performance to a combination of factors including delays and disruption in reopening its supply chain; competition from other retailers; a greater-than-expected decline in sales following the bankruptcy filing and the inability to compete online with attractive pricing or shipping terms.
According to the filings, plans to restructure the US operation into fewer and smaller stores failed to materialise because no deals could be reached with its lenders for adequate funding. In addition, the earnings shortfall triggered covenant defaults which were not waived by all the lenders. The court filings indicate that Toys R Us would have run out of cash by May 2018 without additional funding. As a result, it determined the best way for the lenders to maximise their recoveries was for an orderly liquidation.
Toys R Us continues to look for possible ways to save a limited number of US stores and is in discussions with interested parties about combining the sale of approximately 200 US stores with the sale of the Canadian operations. The detailed procedures to be followed include a bid deadline of 26th March; an auction date of 29th March, if needed; a hearing on 12th April to designate the successful bidder and closing of the sale on 16th April.
In conjunction with the plans to wind down the US operations, termination notices to employees were issued on 14th March allowing for these employees to be paid a minimum of 60 days.
The filings also allow for the continuance for 60 days of the shared services relied upon by the international (Canada, Europe, and Asia) operations. Several companies are thought to be in discussion to acquire the company’s operations in Europe and Asia Pacific.
Toys R Us is said to be actively seeking ways to mitigate the potential adverse impact the wind down of the US operations may have on the international operations, including the ability to continue its private label business, impairment of intellectual property and the loss of shared IT, communications, global branding and other shared services.
