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Why Toys 'R' Us Finally Filed for Bankruptcy

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On Tuesday, after reports that the toy retailer was preparing for financial restructuring, Toys ‘R’ Us filed for bankruptcy Monday night after years of struggling to keep up with competitors and to pay down billions of dollars in debt.

Toys ‘R’ Us’s Chapter 11 bankruptcy filing came in the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond; the company said that its Canadian unit will also seek reorganization in Ontario’s bankruptcy court. Toys ‘R’ Us will remain open, but is protected from creditors’ claims as it begins a court-supervised restructuring plan.

“Today marks the dawn of a new era at Toys ‘R’ Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” said Dave Brandon, chairman and chief executive of Toys R Us, in a statement. “…We are confident these are the right steps to ensure that the iconic Toys ‘R’ Us and Babies ‘R’ Us brands live on for many generations.”

For years, Toys ‘R’ Us was the first stop for shoppers during the holiday rush or if a birthday gift was needed. It’s prominent flagship in New York City’s Times Square, iconic Geoffrey the Giraffe mascot, and stores that held literally thousands of items, a Toys ‘R’ Us was a go-to spot for toys and baby products.

But like many brick-and-mortar retailers, and despite having its own website, the toy retailer could not keep up with customer demand, and the changing ways in which those customers shopped. Competitors like Walmart (WMT - Free Report) , Target (TGT - Free Report) , and especially (AMZN - Free Report) soon eclipsed Toys ‘R’ Us, offering customers much better prices and an overall greater shopping experience.

Its $5 billion debt load hasn’t helped the company much either, with much of that stemming from the 2005 deal that took the toy company private. Toys ‘R’ Us is owned by three companies: private equity firms Kohlberg Kravis Roberts and Bain Capital, and real estate firm Vornado Realty Trust.

We can also look at how traditional toys have declined in popularity among children and teenagers, two demographics that are now more interested in smartphones and tablets, but more importantly, the apps and games for those devices: think Snapchat (SNAP - Free Report) and Facebook (FB - Free Report) -owned Instagram. For a retailer that primarily sells traditional toys, this rise in electronics certainly hurt.

Retail: A Closer Look

Toys ‘R’ Us is not the only private-equity-owned retailer that has suffered. Kids apparel company Gymboree filed for bankruptcy earlier this year, while David’s Bridal, Neiman Marcus, and Nine West Holdings are facing similar financial problems. Neiman Marcus, which is high-end department store, said it was considering putting itself up for sale after trying to pay down its debt load for over a decade. And then you have the laundry list of retailers that have closed hundreds of store locations, including Macy’s (M - Free Report) , Sears , and Bebe .

Heading into the 2017 holiday season, however, Toys ‘R’ Us’s bankruptcy will likely impact the top two toymakers in the U.S.: Mattel (MAT - Free Report) and Hasbro (HAS - Free Report) . Jakks Pacific (JAKK - Free Report) , which makes a wide range of licensed toys, could also feel the effects. Mattel is known for the Barbie and Hot Wheels brands, while Hasbro is the maker of Play-Doh, Transformers, and My Little Pony Toys.

Since initial reports surfaced that Toys ‘R’ Us was weighing its financial options, shares of both Mattel and Hasbro took a big hit, since the retailer made up a sizable percent of the toymakers’ sales last year. But by today, each stock has bounced back, with MAT and HAS closing the day up 1.2% and 2%, respectively.

Toys ‘R’ Us currently operates approximately 1,600 stores, including Babies ‘R’ Us, around the world, and employs 65,000 people in total.

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