The fallout of Toys “R” Us caused some stir in the toy industry. Some investors are asking:
“Is the toy industry in permanent decline?”
“Has the iPad and mobile gaming took away the entertainment from toys”
Or,
“Is this about distribution and price?”
At the moment, I’m lending towards the latter, but it isn’t the main cause for why the bankruptcy of Toys “R” Us. Their bankruptcy is created by a sequence of events, which led to this moment of doom.
As a UK-Based analyst, I will briefly cover some UK toy-related businesses to spot symptoms found in Toys “R” Us.
Let’s begin with what caused the bankruptcy of Toys “R” Us.
What caused the bankruptcy of Toys “R” Us?
Toys “R” Us filed for bankruptcy in 18th September and was one of the biggest toys distributors in the world. Sales peaked at $13.9bn in 2012.
The events unfolded when their bonds (trading as high as 97 cents on 4th September) suddenly took a 78% plunge to below 21 cents, a signal that shareholders are screwed.
But, Toys “R” Us problems go back a long time ago, before it went into administration.
If one looks at their balance sheet, one could spot that it has long-term debt of $5.2bn, along with negative equity of $1.3bn. Meanwhile, it made a quarterly net loss of $164 million.
So, a mix of negative earnings, negative equity and high debt means a toxic mixture that is becoming unhealthy.
The listed problems
Below are the listed problems investors should have spotted, before making an investment in the toy store:
1). Sales were declining steadily; - While the sector grew 5% per annum for the past five years. Toys “R” Us saw a 15% drop in sales in the same period. This tells us the company is losing market share while the sector grew.
2). Can’t pay off interest; - when a business is making losses it had to pay off interest in other ways such as borrowing more money, which increases interest costs. A self-defeating vicious cycle!
3). Debt maturity; - the biggest factor and a major cause of bankruptcy. Any business wants to rollover debt is reviewed by…
