In this segment from Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Danny Vena as they discuss the aftermath of Toys "R" Us' bankruptcy, and how the retailer's struggles are taking their toll on other players in the industry.
A full transcript follows the video.
This video was recorded on Oct. 31, 2017.
Vincent Shen: Before we dive in, I know you wanted a little bit of time to revisit Toys R Us as well. If you missed our previous coverage of the Toys R Us bankruptcy, that news came out in September, you'll need some background on that news and developments since then to have an idea of what's happening with the retailer, obviously an important partner for Hasbro and Mattel, who we will cover shortly. Danny, can you bring our listeners up to speed?
Danny Vena: I sure can, Vince. Going back, you may recall that Toys R Us was acquired by some private equity firms and a real estate developer back in 2005 in a leveraged buyout for about $6.6 billion. Unfortunately, $5.3 billion of that was debt. And because of all that debt maintenance, because of the interest payments, a lot of people felt, and I concur, that basically Toys R Us was pretty much doomed to failure. They had a little bit of bad luck with the timing because of the emergence of e-commerce, and the prevalence of toys starting to be carried by places like Target and Wal-Mart. But the biggest part of that story was the leveraged buyout. With so much interest, they just didn't have a lot of wiggle room in order to take on new initiatives to make the store a little bit better competitor in the current day.
Shen: Yeah, absolutely. I mentioned this last time when we talked about this on the show, the fact that Toys R Us just ran into a few different headwinds, big challenges, challengers, really, to the brick-and-mortar business model that they've always operated with. The investors that took the company private have tried to harvest their investment twice now, with one IPO that was filed and ultimately pulled off the table, rumors last year or the year before that they would be pursuing another IPO. Obviously, the results for the company haven't been strong enough, with the bankruptcy proceedings that we have now.
But you have kids now these days, busier than ever. There's less playtime. Children are turning to smartphones and electronics at really young ages, which means less of the traditional action figures, puzzles, and games at Toys R Us has previously featured heavily in their stores. But at the same time, the bankruptcy, I think it's important to note, does not mean that all Toys R Us stores will be closing their doors. The company will be open for business, and it's really important, obviously, this time of year as we approach the holiday shopping season. The company will actually be focusing on a few initiatives during this period to attract customers. They want to make sure that 1) shoppers know that Toys R Us is open for business during the holidays. Make sure that, if necessary, they spend on the marketing to make that known to their core customers. They want to stress, for example, their price-match guarantee as well, which they've always had but start focusing on that more, making that more known to customers, helping to potentially change the perception of the brand, take a little bit of market share.
They want to emphasize, also, in their marketing, the bond that kids can have with their brand, and changing up the in-store experience so it's more interactive, more experiential, to boost foot traffic. We've talked about that trend for a lot of brick-and-mortar retailers in the past. At the same time, they also want to change the way they used some of their stores, offering classes, event spaces as a way to win over both parents and their children. The company generates about 40% of its sales in this last quarter of the year. Toys R Us has been able to reassure and essentially renegotiate through the bankruptcy proceedings with most of its vendors and suppliers in order to keep their store shelves stocked, which is obviously very important. They can't be entering this very busy time with lower inventory levels, or weak inventory levels, for this period. Hopefully, coming out of the bankruptcy proceedings, they'll be a little bit leaner, they'll make the right investments in their stores and in the online channel and the company brand can survive. Any other thoughts from you, Danny, looking forward for Toys R Us? Things they might need to focus on? Your thoughts?
Vena: I do know that, listening to Hasbro's conference call, they made a point to say that they had just renegotiated with Toys R Us, that they had temporarily suspended shipments to them, but they had come to an agreement. So I think, that's probably indicative of what's happening with a number of the major toy suppliers. I think Toys R Us will have supplies going into the all-important holiday shopping season. We'll see here and the next couple of months how that turns out for them.
Shen: Absolutely. If I recall correctly, Toys R Us said that they've been able to iron out the relationships and the deals they have with 49 of their 50 top suppliers, again, to make sure that their stores are ready to go with the hottest toys as parents roll in for the holidays.
Danny Vena owns shares of Hasbro and Mattel and has the following options: short December 2017 $75 calls on Wal-Mart Stores, long January 2018 $57.50 calls on Wal-Mart Stores, and long January 2018 $55 calls on Wal-Mart Stores. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool has a disclosure policy.