The Toys “R” Us saga continues, and while this week hasn’t been as explosive as some in recent months, there has been some activity worth noting. Earlier this week it was reported that the bid for pieces of Toys “R” Us operations in the U.S. and Canada by MGA Entertainment’s Isaac Larian has been rejected for “not meeting the threshold” – a statement that left many to question what exactly that threshold would be. For Canada, we now have a number, and it came via a filing of notice for a stalking horse bidder. Fairfax Financial Holdings Limited has entered into an agreement to buy the Canadian operations for $300M in Canadian dollars – equivalent to about $237M US. Larian’s bid for Canadian stores was $215M.
A “stalking horse” bid sets the minimum price that Toys “R” Us will accept for the operations, and unless they’re outbid at auction (other bidders have until Monday), Fairfax will win the company.
As news of the bid became public last night, social media lit up understandably with concern for what this means for the U.S. operations. Quite simply – not much. While there was talk of bundling certain U.S. stores with the 82 in Canada, the current bid by Fairfax does not include any of that. Because many of the details on these matters are private, it is possible that other bids that package things could emerge, but for now this is Canadian operations only.
On the U.S. front the wind-down continues, and I’m still hearing from a lot of current TRU employees in addition to some customers with comments and concerns. Members of both groups have some confusion as to how this process is unfolding and why… but the bottom line is that there’s little anyone can do about it to change course right now. Even if a bidder came in and offered a massive amount of money for the U.S. operations today, that’s not going to stop the wind-down and closure process. If Toys “R” Us does continue in a brick-and-mortar form, there will be a restart. As I mentioned in a previous article, look at what happened with the closure of Gander Mountain and its rebirth as Gander Outdoors as an example of how it could happen. As of right now, the process is moving along with the idea that there will be no Toys “R” Us (as we now know it) once the proceedings are finished. At some point, someone will end up owning the name.
One area of confusion has to do with who owns the merchandise right now and why the markdowns are moving along slowly. Generally in a retail bankruptcy, a liquidator purchases store assets at auction, after which they take ownership of the merchandise and control of the stores. That hasn’t happened with Toys “R” Us yet. It is unusual, but not unheard of. Months ago, TRU brought on liquidation specialists to work with them on the wind-down of stores. Locations have been assigned a liquidator, but as of now those individuals are acting as consultants or third-party managers that are helping to liquidate someone else’s property. There’s more than one company at play, and this Quartz article from January sheds some additional light on how that came to be. Should a liquidator win TRU assets at auction, the game will change.
While the discounts increased slightly this week, most items are at 15% off despite signage claiming “up to 40% off” storewide. Some consumers, especially those of the “deal-seeking” variety (I think of them as the rude folks who show up at my garage sales each summer and angrily complain about pricing while offering $0.25 for items marked $1) have been voicing frustration on closing prices not being low enough. We aren’t seeing deep discounts yet because these sales aren’t meant to help people find a deal – they’re meant to bring as much money as possible to pay back creditors, and thus far it’s working. Sales have been brisk, blowing away expectations… but they are slowing. In the meantime, stores are still receiving full truckloads of merchandise, with distribution centers still sitting at roughly 30% capacity. Certain categories (baby gear being a big one) are massively overstocked, so once those deals do kick in – there’s some good stuff out there. If you are out there looking for a deal, please remember: don’t be a dick. No one at store-level has any control over deals or lack thereof… nor do they care about your ability to get a good score (we’ll talk more about that later). Being a good person while interacting with members of families that are facing the uncertainty of unemployment – that’s what’s important.
