WAYNE, NJ–Toys R Us filed documents in bankruptcy court on Thursday seeking approval to liquidate its inventory in its approximate 800 US stores. It is not an entirely unexpected move, following the retailer's bankruptcy last September and its subsequent move to liquidate about 180 stores under its initial restructuring efforts. It is unclear what the final catalyst was for this latest filing — news reports have said the company has been unable to stay on top of its loan payments and lenders had been urging a complete liquidation.
The company filed for bankruptcy protection with $4.9 billion of debt, much of it originating when KKR, Bain Capital Partners and Vornado Realty Trust took the retailer private in 2005.
It is unclear what will happen to the retail stores; most certainly will closed but Reuters reports that the retailer is in talks to sell 200 of its stores as part of a deal to sell its 80 or so stores in Canada.
Also, the company may receive an offer for all of its stores in a March 29 auction it is holding. It will announce the winning bidder on April 12, according to Reuters.
The Move To Experimental Retail
But while Toys R Us' immediate problems are the massive debt under which it is laboring it should not be ignored that it also struggled with a fundamental problem in the retail industry today, which has been a wholesale shift to experimental concepts for physical stores as e-commerce picked up the commodity products.
The reality is retailers like Toys R Us are heavily dependent on mall locations,” Jeff Holzmann, managing director of iintoo, an international CRE investment platform, tells GlobeSt.com. Toys R Us' business model depended on a huge real estate footprint for its inventory and a prime location, neither of which are sustainable in the current environment.
Lower-Quality Malls
Indeed, if there is a wholesale liquidation will still certainly batter an already-battered mall industry — especially the class B and C malls in which most of Toys R Us stores are located. Suzanne Mulvee, director of research for CoStar, told The AP that 51%, or 450 Toys R Us's stores are in shopping centers considered low-quality.
It possible — perhaps even likely — that these mall owners may be able to fill at least some of the empty space, according an earlier GlobeSt.com interview with Daniel Herrold, a senior director of Stan Johnson Co., that took place after Toys R Us' bankruptcy filing. The industry is seeing challenges in backfilling vacant space is in the larger department store prototypes – sizes of 100,000 to 200,000 square feet and greater, from the likes of Sears, Kmart, and others, he says. “But for stores in the 20,000 to 40,000-square-foot range, which is the typical Toys 'R' Us footprint, there is strong demand from various types of retailers including Burlington, TJ Maxx, Ross Stores, Party City, Michaels, Hobby Lobby, and various fitness chains.”
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
