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Tuesday, March 20 2018 22:29

Dark Days in Toyland: Toys "R" Us is Officially Liquidating - Court Approval Granted as Massive Fallout Begins...

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If you thought it was sad when Toys "R" Us filed a motion to liquidate its remaining U.S. stores, that was just the beginning. The memes circulated quickly with images of a tearful Geoffrey the Giraffe, often accompanied by a viral video of the iconic Toys "R" Us jingle performed "in a minor key" (I'd share it here, but frankly, I just didn't think it was very good). Nearly a week has passed since that motion was filed, with the fate of over 33,000 jobs hanging in the balance. Retail workers on the front lines had to deal with an onslaught of rude customers this past weekend, many fussing over a "lack of sales" at the 735 stores that hadn't already been slated to close. The customer abuse from deal hunters was reported from coast to coast, with some stores placing makeshift signs at their doors and on their store-run Instagram accounts to remind the public that those responsible are not at store level, and to please tread lightly in dealing with workers who will soon be out of a job. On Sunday came word to cancel all upcoming store events... and on Monday the call went out to hire temporary workers to fill 60-90 day positions to assist in purging warehouses and closing stores. The moves were happening without approval from the Bankruptcy Court... but now that approval has been granted. After an 8+ hour hearing on March 20, Judge Keith L. Phillips ruled that Toys "R" Us could proceed with the liquidation plan that they'd filed on March 15. What will take place in the days and weeks ahead is already being called "the largest retail liquidation in U.S. history." 

I have written so much about the Toys "R" Us situation in recent months, but there are some very important factors that I still think much of the general public does not understand. These points need to be made very clear:

  • Toys "R" Us did not collapse because "toys don't sell."
  • Toys "R" Us did not collapse because of Amazon, Walmart, or online shopping.
  • Toys "R" Us did not collapse because "kids want iPads, tablets or devices."
  • Toys "R" Us did not collapse because of "millennial parents."
  • Toys "R" Us did not collapse because of "high prices."
  • Toys "R" Us did not collapse because of a "lack of vendor support" (as CEO David Brandon claimed)

Those arguments only go so far as they're quickly dismantled by the fact that Toys "R" Us moved over $11B in toys in 2016, a number comparable to other recent years. Brandon, who was seeking Court-approved bonuses while his company was sinking, must've forgotten the fact that vendors were still shipping product to his stores on unsecured credit not only through the holiday season, but as recently as this month. 

Toys "R" Us DID collapse because it was buried under over $5B in debt that it was strapped with during a leveraged buyout in 2005 in which Bain Captial Partners, KKR and Vornado Realty Trust put down a little of their own money and financed the rest. In the years since, TRU has been spending over $400M a year just in interest payments on their loans. Without that debt, TRU could've invested in their stores to modernize them and bring the "magic" back to the experience, all while maintaining fair pricing. Thanks to the equity crew, TRU could never invest in themselves.

Over the past few months, I have spoken to a number of staffers from Toys "R" Us' New Jersey headquarters, all under the condition of anonymity, in addition to several vendors with ties to the company. If anyone would like a manual on how not to run a business, it's quite possible that David Brandon and his executive team at Toys "R" Us just wrote it. Never in my life have I heard of the kind of morale-crushing, relationship-ruining behavior that's been exhibited by Brandon and his crew. On March 14, 2018, ahead of the conference call in which Brandon revealed the liquidation plans to the world, he held a company meeting during which he laid blame on everyone but himself and his team, all while claiming that he "doesn't play the victim card." Partial audio from that meeting was acquired by NorthJersey.com, who has published that to be heard in the player below. Brandon blames his customers, his vendors, and even "the media" for the downfall of his company, going full-on supervillain in stating "they will all live to one day regret what has happened here." This is the CEO of Toys "R" Us...

There will be much finger-pointing, and from where I sit as an outsider with no formal ties to the company, I want to use Toys "R" Us as an example of how badly we need accountability in this country. I stand behind my theory and opinion (detailed here) that there was never any intention of saving Toys "R" Us. I believe that Brandon was hand-picked and placed into the role of CEO by Bain Capital with the specific intention of unraveling the business. Brandon told the Wall Street Journal back in 2015 that Bain, KKR and Vornado Realty Trust were seeking to exit the Toys "R" Us business. Why else, then, would you put a man fresh from a disgraced tenure as the Athletic Director of the University of Michigan into the top spot at a toy retailer, when he had no real experience in retail (sans a couple fluff spots on boards), nor a passion for toys?

Even the "Honorable" Judge Phillips is deserving of a look. While I have no knowledge of how he's handled prior cases, there's nothing honorable about awarding bonuses to the executives of a sinking ship. Even if they were "retention" bonuses intended to keep certain people around, perhaps the company would've been better off without those people? And for any executive at any company to accept a "bonus" while their business is failing and jobs are being lost is absolutely 100% despicable. As I've said before, reward should be a fruit of success, not something that comes as a "participation trophy" for immense failure, especially when that failure is the destruction of someone else's legacy and the livelihoods of thousands.

At today's hearing, Judge Phillips went unswayed by attorneys who stood in line to voice their objections to the Toys "R" Us liquidation plan. As the local paper reported, there were so many people there that an overflow courtroom had to be used. One big admission was that TRU was indeed still accepting shipments this month, and they have to pay for those received after March 5... but the $450M owed from before that will remain unpaid.

As more objections started appearing in the docket this week, one word that began popping-up with increasing regularity was "fraud," and with the liquidation sales about to begin as soon as Thursday, those to whom Toys "R" Us owes money are done being silent. 

Among the first to speak up is Jay Foreman, CEO of Basic Fun!, a small toymaker with some great lines. In an interview with The New York Post, Foreman said the following in regard to TRU stringing along their vendors (the ones that David Brandon called "unsupportive," no less) to keep stores stocked through the holidays and into 2018:  “It was certainly ethical fraud and disgusting and despicable. It is my belief from the actions the company took leading up to and during the bankruptcy process that the most senior executives, advisers and lawyers executed a fraud."

At a January meeting with a TRU exec with whom he'd done business for 15 years, Foreman was promised $2.6M "provided that shipments would continue." Toys "R" Us continued getting product, but Basic Fun! has yet to be paid.

I had no intention to keep following this story as I have, but there's no stopping now. Expect to hear more in the days and weeks ahead as more people begin to speak up. While the toy industry should recover after some short-term impact, there's a ripple-effect that I fear will be far-reaching... with the worst-case scenario being that the Toys "R" Us collapse will signal the beginning of a new recession. Let's hope I'm wrong.

Bonus: This image of Toys "R" Us CEO David Brandon was captured shortly after today's Court ruling...

David Brandon, CEO - Toys "R" Us

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James Zahn

James Zahn is not a journalist, nor a blogger, though he may be credited as such by others, or even accept the title... depending on the circumstance.  Instead, he considers himself largely to be an "entertainment and lifestyle writer," bringing 25+ years of experience in the entertainment and publishing industries into the family realm as THE ROCK FATHER™.

As a media personality, commentator, adventurer and raconteur, James now finds himself raising a pair young girls - The Rock Daughters™ - along with his wife from their Illinois home.

He is a member of The Toy Insider Parent Advisory Board, has contributed to The Toy Book and regularly serves as a Brand Ambassador and spokesperson for several Globally-recognized pop culture and lifestyle brands in addition to consulting for a number of toy manufacturers. 

Creatively, James has directed/edited music videos, lyric videos, and album trailers for bands such as FEAR FACTORY, has appeared as an actor in feature films and commercials, written comic books, and performed in bands. He currently serves as an artist manager and video director for PRODUCT OF HATE, whose debut album was released by Napalm Records in 2016, distributed by ADA/Warner Music in the U.S. with Universal Music handling global.

James and/or his work have been featured in/on CNN, FOX Business, NBC, ABC, WGN, G4, The Chicago Tribune, BusinessWire, Babble, Fangoria, Starlog and more. He's appeared as a music expert on CNN's AC360 alongside Anderson Cooper, and has been interviewed by Larry King. In the past he served as a writer for the Netflix Stream Team,  Fandango Family and PBS KIDS, penned articles for Sprout and PopSugar, and was a contributor to Chicago Parent.

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