What happened

Shares of toymaker Mattel (NASDAQ:MAT) slumped on Monday as reports about a possible bankruptcy filing for toy retailer Toys "R" Us proliferated. With annual revenue of $11.5 billion spread across more than 1,600 stores, Toys "R" Us would be one of the largest retailer bankruptcies in recent memory. Mattel stock was down 6% at 2:45 p.m. EDT.

So what

Toys "R" Us, which was taken private in 2005 in a $6.6 billion leveraged buyout, is struggling with a debt load of nearly $5 billion. The company's operating income was completely wiped out by interest payments in 2016, and with comparable sales in decline, the situation will only get worse without some sort of restructuring.

The Toys "R" Us logo.

Image source: Toys "R" Us.

Mattel is struggling as well, following years of management missteps and weak demand for its core brands. The company's revenue and profits have been in decline since 2014, and new CEO Margo Georgiadis, who took the helm in June, plans to reinvent the company.

A Toys "R" Us bankruptcy prior to the holiday season could have significant negative consequences for Mattel. In 2016, Toys "R" Us accounted for about $600 million of Mattel's revenue, more than 10% of its total revenue. If Toys "R" Us ends up closing stores as it restructures its debt, Mattel could see an unexpected holiday sales dip that would complicate the company's turnaround efforts.

Now what

A Toys "R" Us bankruptcy filing is still only a rumor, although based on the company's results, a restructuring of some kind seems inevitable. Mattel is undoubtedly a loser in this situation, although it's unclear how much of an impact a bankruptcy filing will have on the company's holiday season.

Shares of Mattel were already down roughly 50% prior to Monday's tumble. If Toys "R" Us goes through with a restructuring, there could be more pain ahead for Mattel shareholders.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.