Business & Tech

Toymakers say there is ‘widespread panic’ following Toys R Us bankruptcy

Shoppers walked into a Toys R Us store in San Antonio. Toys R Us, trying to reorganize under bankruptcy leading into the holiday season, was seeing overall sales fall and those at established locations drop even more sharply as it was heading for a Chapter 11 filing.
Eric Gay/Associated Press/File 2017
Shoppers walked into a Toys R Us store in San Antonio. Toys R Us, trying to reorganize under bankruptcy leading into the holiday season, was seeing overall sales fall and those at established locations drop even more sharply as it was heading for a Chapter 11 filing.

Within hours of Toys R Us’s bankruptcy filing last week, the maker of Max Tow Truck and Animal Babies Nursery sounded a financial alarm of its own: Jakks Pacific, the company said, expected to swing to a loss this year as a result of the mega-retailer’s bankruptcy.

Toys R Us owes $14.06 million to Jakks, which last year posted a profit of $1.2 million, making the California-based toy supplier one of more than 100,000 creditors sideswiped by the toy chain’s bankruptcy in the run-up to the all-important holiday season. In total, Toys R Us owes $7.5 billion to a group that includes virtually every major toymaker in the country: Mattel (owed $136 million), Hasbro ($59 million), Spin Master ($33 million), Lego ($32 million), Radio Flyer ($12 million), Crayola ($2.6 million).

As toymakers and suppliers decide what to do next, many say they are likely to lose millions of dollars as a result of the bankruptcy, sending a ripple of financial troubles throughout the toy industry.

Advertisement

This year ‘‘continues to present a challenging retail environment, which has now been further disrupted by the Toys R Us Chapter 11 filing,’’ Stephen Berman, chief executive of Jakks said in a statement. ‘‘For the past 22 years, Toys R Us has been one of Jakks’s most significant business partners.’’

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

A spokesman for Lego, which has been weathering its own financial troubles, said the company is ‘‘deeply engaged in ongoing dialogue’’ with Toys R Us as the companies try to figure out what’s next. Others said they were consulting bankruptcy attorneys and financial advisers to sort out shipments — and payments — related to holiday inventory. VTech, the maker of electronic toys and tablets, says it expects holiday sales to Toys R Us ‘‘to decline.’’ Meanwhile, a handful of smaller companies say they have already severed ties with the world’s largest toy store chain.

‘‘We don’t want to have anything to do with them anymore — not online, not in stores, not at all,’’ said Linda Parry Murphy, chief executive of Product Launchers, a supplier that connects smaller toymakers with retailers. ‘‘This is a crushing blow to startups.’’

The companies she represents — mom-and-pop companies that make fidget spinners, do-it-yourself slime kits, children’s nail polish, and other novelty items — rely heavily on Toys R Us for visibility and sales, and often spend months customizing items to the retailer’s specifications.

But, she said, she has little hope that the five toymakers will receive even a fraction of the $1.2 million they are owed.

Advertisement

‘‘We’re bottom of the barrel when it comes to getting paid back,’’ she said. ‘‘They’ll get to us last, even though we’re the ones who will get impacted the most.’’

Toys R Us is just one of more than 300 retailers to file for bankruptcy this year, as Americans ditch the shopping mall in favor of their laptops, smartphones, and tablets. The company has been on a downward spiral for years, crushed by growing competition and mounting piles of debt. Annual sales have fallen for six years in a row, and last year Toys R Us reported a loss of $29 million.

On Wednesday, Toys R US said second-quarter sales had tumbled 5 percent to $2.17 billion, from $2.28 billion a year earlier. The company also reported a $165 million loss, and said same-store sales — a closely-watched measure of sales at stores open at least one year — fell 4.4 percent, which it attributed to slowing demand in the United States and Canada.

Bankruptcy experts said the company’s future will largely depend on whether it can persuade its suppliers to keep shipping their products, particularly ahead of the holiday season, which accounts for about 40 percent of the company’s annual sales.

‘‘If the bankruptcy filing does not allay supplier fears and consumer fears, the holiday shopping season could be disastrous leading to, at a minimum, store closings or possibly a complete liquidation,’’ said Tom Arnold, a finance professor at the University of Richmond Robins School of Business.

Advertisement

Toys R Us announced Monday that it had received $3.1 billion from JP Morgan and others to help pay for inventory and company investments. While some suppliers said they were optimistic that the money could help shore up the company, others said they worried about their own long-term prospects.