Toys ‘R’ Us is Going down and so is Mattel

On Monday 18^th of September 2017 Toys ‘R’ Us filed for bankruptcy according to chapter 11 of the U.S Bankruptcy code. This allows the company legal protection while restructuring to allow them pay their debt. A debt which runs in excess of $5 Billion.

The news of the bankruptcy hit some of its partners hard. Perhaps the worst hit of them all is Mattel. Mattel, the online toy giant has reported that online sales had dropped in this quarter since the announcement by Toys ‘R’ Us. This is great cause for alarm as it puts them in a very difficult situation since Toys ‘R’ Us is their largest customer.

What went wrong?

Even to the outside observer, it was obvious that Toys ‘R’ Us was having a hard time. The emergence of Amazon as a really viable market and the declining market share meant that Toys ‘R’ Us were in a race against time to make sure they survived. In a bid to expand and reassert itself they piled up a ton of debts that have haunted them ever since. As easy as it is to point the finger at Amazon’s aggressive approach to business, we also have to understand that the debt issues faced by Toys ‘R’ Us is a lot more complex than meets the eye.

In April 2016, Toys ‘R’ Us reported a quarterly net loss of $107 million. By April this year the quarterly net loss had reached $164 million. This is an attribute of the dwindling sales that the company has been faced with of recent. Again, this is not just an Amazon ‘thing’ as the actual toy market grew over that period, signalling an inability of the company to keep up with trends.

The trend in particular here is the death of brick and mortar stores. Toys ‘R’ Us’ inability to keep track of changes in the market have made them lose their competitive edge. This inflexibility coupled with the mounting pressure of their existent debt of $5 Billion dollars forced the hand of company into filing for bankruptcy.

How does this affect Mattel?

Mattel is an important partner to Toys ‘R’ Us. They are actually one of the largest partners, so it is natural that the development has hit them harder than most others. Mattel saw it’s sales this quarter drop by 22%. The company has cited the bankruptcy proceedings as a big factor in the drop in sales.

Toys ‘R’ Us also owes Mattel a lot of money running into millions of dollars. It has been reported that Toys ‘R’ Us owes Mattel up to $136 million. This puts Mattel in a very difficult situation as one of their biggest customers is in financial limbo. This same customer happens to owe them a lot of money that they are finding difficult to pay back.

This has affected Mattel in a really bad way, seeing its share prices drop by over 20% when the bankruptcy was filed. In response, Mattel has suspended its quarterly dividend in a bid to explore their options.

What is Toys ‘R’ Us’ plan?

Toys ‘R’ Us have said that to fight through this, they are going to restructure their debt. This means the company will have to renegotiate some terms of their agreement (with the various creditors) so as to reach an agreement that makes it easier for them to pay up.

Toys ‘R’ Us have also committed to enhancing their website. This is with the aim of promoting their online presence to better compete with other giants that have a foothold on the internet scene. With all these measures and many more in place, Toys ‘R’ Us should be back on their feet in no time and ready for business again.

Can you still shop with TRU for the holidays?

Toys can still be purchased at the thousands of Toys ‘R’ Us outlets all over the world. The company has announced that they will not be closing any of their stores. They have also gone on to assure the general public that their international subsidiaries are unaffected in any way. They have however noted that the Canadian subsidiary was also willingly filing for bankruptcy

The Company, via their website have said that all forms of their customer programs both locally and internationally remain open. They have also stated that they will continue to honor warranties, gift cards, and return policies as well.

The long term impact of this series of event is yet to be seen. But this follows a series of trends that have developed pointing to the death of brick and mortar stores as well as major brands associated with them, and unless Mattel along with Toys ‘R’ Us do something quick, they will be continue to see losses and drops in sales until the inevitable happens.

So what do you think about this? Do you believe that Mattel by extension Toys ‘R’ Us have a shot? Well, let us know your thoughts down in the comments section below.

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