Hope springs eternal for Toys R Us as the CEO of Bratz dollmaker MGA Entertainment said recently that he wants to sweeten his bid to buy 274 U.S. locations of the toy store out of bankruptcy.
The possibility has got to be welcome news for toymakers like MGA, Hasbro (NASDAQ: HAS), and Mattel (NASDAQ: MAT), which face the prospect of a years-long depressed toy market should Toys R Us really disappear. Hasbro reported that first-quarter sales plunged 16% to $716 million, well below the $825 million that was forecast, primarily because of the Toys R Us bankruptcy. Though Mattel said North American sales only fell 4% in the first quarter, that was due to sales reversals because of the toy store's liquidation. MGA has estimated that Toys R Us accounted for 20% of its sales.
However, MGA CEO Isaac Larian contends the Toys R Us liquidation process is devaluing the chain and the intellectual property he wants to buy, so he is considering what that means for his renewed bid. CNN reports that Larian said, "We have the financing we need. It's now a matter of determining how much more we're able to bid."
Filling a vacuum
Even at the end, Toys R Us commanded a large 13.6% share of the U.S. toy market, with some $7 billion in annual sales. It was done in, though, after its private equity owners, Vornado Realty Trust, Bain Capital, and KKR, engineered a $7.5 billion leveraged buyout and saddled the business with some $5 billion in debt.
Walmart remains the biggest toy seller with a near-30% share of the market, followed by Amazon.com at just over 16%. Both would likely gain more share from their rival's demise as there are no other pure-play toy stores of national consequence, but both KB Toys and F.A.O. Schwarz are planning comebacks.
While other retailers will undoubtedly expand their own toy departments to meet the needs of consumers, which ought to lessen the impact of Toys R Us' bankruptcy on Hasbro and Mattel, Larian still believes the toy industry as a whole will be depressed. "If Toys R Us doesn't exist, the whole toy industry will be hurt for a long time," he told CNN. He also thinks it would be odd if the toy store was saved in Canada, Europe, and Asia, but goes under in the U.S., where it started.
A deep hole to climb out of
Larian's original campaign to save Toys R Us supposedly included other toy companies, but they ultimately backed out of trying to buy the business, which he called short-sighted. He estimates that 130,000 U.S. jobs will be lost if the toy store is not saved, not just at Toys R Us, but also at suppliers, distribution centers, and trucking companies. Larian has said the plant for his own Little Tikes brand, which represents 25% of company sales, would also be affected.
Larian previously bid on Toys R Us' Canadian assets, but after billionaire investor Prem Watsa reached a $237 million "stalking horse" bid to buy the business through his Fairfax Financial investment vehicle, Larian withdrew. A stalking horse bid is the first bidder with whom the company negotiates a purchase agreement, and it sets the floor for subsequent offers. He believed Watsa would be able to turn the business around.
There continues to be substantial doubt about whether Toys R Us will be saved, and it fully depends on how much Larian is willing to spend to buy the chain. While it's not over until it's over, we are quickly approaching the time when the chance for the toy chain's survival has reached its logical end.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Hasbro. The Motley Fool recommends KKR. The Motley Fool has a disclosure policy.