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Toys 'R' Us Tells Workers It Will Likely Close All U.S. Stores

The Wall Street Journal. logo The Wall Street Journal. 3/14/2018 Paul Ziobro, Lillian Rizzo

Toys ‘R’ Us Inc. told employees Wednesday the struggling big-box retailer will sell or close all its U.S. stores, a collapse that threatens up to 33,000 American jobs in the coming months.

The 70-year-old chain, which filed for bankruptcy protection in September, has more than 700 remaining U.S. locations, including Babies ‘R’ Us stores. It would be one of the biggest retail liquidations since The Sports Authority filed for bankruptcy in 2016 with 14,500 workers and closed more than 460 stores.

Chief Executive David Brandon delivered the company’s fate to workers at its Wayne, N.J., headquarters. The company plans to file liquidation papers Wednesday evening in advance of a bankruptcy court hearing on Thursday.

“I have always believed that this brand and this business should exist in the U.S.,” Mr. Brandon said on a follow-up conference call with staff, adding that he guarantees that vendors who failed to support the retailer during the holidays and customers who shopped elsewhere will miss the retailer.

They “will all live to regret what’s happening here,” Mr. Brandon said.

Toys ‘R’ Us has struggled with more than $5 billion in debt from a leveraged buyout. It also was squeezed by competition from Amazon.com Inc. as more parents shop online, as well as discount retailers such as Walmart Inc.

In addition to shutting down U.S. operations, Mr. Brandon told staffers the company was likely to liquidate in France, Spain, Poland and Australia. It plans to sell its operations in Canada, Central Europe and Asia. The company is also trying to package its Canadian business with 200 U.S. stores and find a buyer, the CEO said.

“We’re putting a for sale sign on everything,” Mr. Brandon told employees. “Frankly, all anyone has to do is offer one dollar more” that is being offered by liquidation firms. The company will pay workers at least 60 days of salary and benefits.

Outside the U.S., the chain has another roughly 800 stores. Altogether, court papers show Toys “R” Us has roughly 1,600 stores globally, with approximately 60,000 employees. That number reaches more than 100,000 during peak holiday season.

The retailer’s U.K. arm recently filed for the British equivalent to chapter 11 protection, and will close more than 100 stores. This would eliminate nearly a third of its European footprint.

On Wednesday’s call, Mr. Brandon detailed how the company’s fate spiraled toward a liquidation during the last few frantic months. Following the September bankruptcy filing, holiday sales at Toys “R” Us were “no short of devastating” and well below expectations. The chain’s earnings before interest and taxes was “less than half” of the $600 million it typically generates in a year, he added.

The company revamped its restructuring plans to calm vendors. First, it announced plans to close 182 U.S. stores, or about 20% of its base. Then it offered to shrink to about half its original U.S. footprint.

After the U.K. business began liquidating, Toys “R” Us decided to jettison its baby business entirely, since that was where margins were shrinking and its market share were falling. Lenders were supportive but worried about the costly upgrades needed to bridge the business to the holidays, the CEO said.

“The last six months have been pure hell,” Mr. Brandon said during the 30 minute call, while audibly battling a cold.

a person standing in a room© kholood eid/Reuters

The demise of Toys “R” Us, which had more than $11 billion in global revenue last year, poses a serious challenge to the $27 billion U.S. toy industry. The chain was a vital cog in the industry as its stores carried a breadth of toys unmatched by rivals, nurtured smaller companies and offered a spot on shelves for tinkerers hoping to hit it big.

Toys “R” Us was toppled by external forces and those of its own making. Amazon has taken a large slice of the toy industry, as online shopping cuts the need to visit stores to buy toys that will ultimately be wrapped for holidays or birthdays. The internet also heightened price wars, as Amazon, Walmart Inc. and Target Corp. fought hard for toy sales, often using popular items as loss leaders that could lead to sales of other products.

Other retailers have been able to survive the shift to online shopping and adjusted their business model to suit. But Toys “R” Us has struggled to find a path forward due to debt accumulated from the $6.6 billion buyout by Vornado Realty Trust and the private-equity firms Bain Capital and KKR & Co. in 2005.

The company’s debt has limited the chain from investing in initiatives that could have ensured a future, like a better online platform, loyalty programs and store remodels that could have enlivened stores with more toy demonstrations, like Nerf shooting galleries or test drones.

Write to Paul Ziobro at Paul.Ziobro@wsj.com and Lillian Rizzo at Lillian.Rizzo@wsj.com

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