The Toys R Us Drama Continues

Toys R Us. What once was a global empire has now been reduced to a shell of its former self. They have a flagship store in New Jersey, and by the end of the year, all Macy’s stores will have a Toys R Us mini-shop.

The Toys R Us website also redirects customers to Macy’s online store, but Toys R Us has been regularly adding content to their YouTube channel and has also gotten into NFTs.

But despite entering bankruptcy and emerging as a new company, Toys R Us executives aren’t able to escape the past quite yet.

Toys R Us’ History: A Recap

Toys R Us’ origins dates back to 1948, and first official Toys R Us launched in 1957.

In 1978, Toys R Us became a publicly traded company.

In 2005, the company went through a leveraged buyout, and 80% of its purchase price was added onto its debt.

Toys R Us filed for bankruptcy in 2017 as a way to pay for products in anticipation of the Christmas rush, but all of its stores in the US were shuttered in 2018. The owner of MGA Entertainment had offered $675 million to keep some stores running in the US, but this offer was rejected since it supposedly wouldn’t cover enough of Toys R Us’ debt. Global locations were either closed or sold.

After Toys R Us filed for liquidation, many companies only received minimal payments on the merchandise they sent in late 2017, early 2018 for an average of 22 cents for every dollar they were old.

In October, the owners of Toys R Us decided at the last minute the name and such were too valuable to be auctioned off and wanted to reopen the business themselves. Eventually, the company behind Toys R Us would be called Tru Kids.

Employees would eventually get part of a $2 million severance after they said the company reneged on compensation. This was after the two private equity firms that owned Toys R Us (but not the real estate investment firm) set up a $20 million fund separate from Toys R Us right around the time the idea of ​​opening new stores was announced..

Toys R Us teamed up with several companies like Kroger, Target, and Amazon to run its website and/or create Toys R Us sections in stores.

The revived Toys R Us opened two stores, which shut down because of the pandemic. Shortly after, WHP Global, the company behind clothing lines Anne Klein and Joseph Abboud, took a controlling interest in Tru Kids in 2021.

Their current (and only) store opened at the end of 2021.

Which brings us to the present day.

The Lawsuit

I say that, but let’s go back to 2020 for a moment. Various Toys R Us creditors (mostly suppliers of toys and other goods) filed a lawsuit against the company.

The suit alleges Toys R Us executives and the equity firms that purchased Toys R Us were receiving high salaries and payments. In addition, companies argue Toys R Us was ordering product when the toy store had a strong indication — or outright knew — they couldn’t pay. Retail Dive He describes Crayola’s situation and opinion, which was similarly echoed by companies like Munchkin and Basic Fun!:

“In a scathing court filing, attorneys for Crayola said in March that the retailer began ‘rapidly accelerating’ orders from the handicraft maker after the holiday season, beginning in early January and through much of February. In January alone, Toys R Us ordered and received $1 million in Crayola products, attorneys said. By the time of Crayola’s March 23 filing, which came about a week and a half after Toys R Us moved to liquidate, the retailer owed the company nearly $2 million for goods shipped since Jan. 10.

Attorneys for Crayola pointed to a March 20 hearing in which Toys R Us’ financial advisor acknowledged, in their words, that the retailer and its advisors were ‘aware well before the end of January 2018 of impending covenant defaults’ under their DIP loan and would run out of money in North America by mid-May as a result.

In short, Toys R Us kept ordering product that he knew, or certainly should have known, it might not fully pay for. Crayola went so far in court as to call Toys R Us’ behavior ‘irresponsible and potentially illegal.’”

the case, TRU Creditor Litigation Trust v. Brandon et alchanged jurisdictions, but otherwise, not much progress had been made, likely at least in part due to the pandemic.

However, the creditors continued to push for a trial, as they believe Toys R Us and its affiliates and backers committed fraud, and the company should not have even been entered into bankruptcy because of how bad Toys R Us’ financial situation was — and definitely not under the strict, high-fee terms of the loans.

The lawsuit states Toys R Us placed $600 million worth of orders on credit between December 2017 and March 2018 which caused a loss of $800 million. The toy companies and other creditors, which includes Funko, Hasbro, Mattel, The LEGO Group, and more, those want losses covered as well as punitive damages.

As of now, the plaintiffs will have their day in court.

Toys R Us Logo

The judge dismissed one count, but Toys R Us executives and directors along with partners of the private equity groups behind the company will face a trial on:

  • Ordering and accepting $600 million in goods despite the possibility or likelihood of liquidation.
  • Corporate bonuses and private equity advisory fees from 2014 to 2017.

Axios says this lawsuit could be groundbreaking since a group of creditors wants to get money back from a private equity company when insurance usually helps cover such situations.

I’ve made my feelings on the Toys R Us closure known in previous articles, but I’ve always viewed the sudden liquidation as suspect. First of all, when you have multiple big names and small companies all saying the same thing, that they were sweet-talked into sending shipments in to Toys R Us just months, weeks, or even days before Toys R Us announced they were shuttering… yeah, highly suspicious.

Interestingly enough, the lawsuit argues Toys R Us should have actually started shutting down around August 2017, so likely finishing liquidation around Christmas. Would have arguably been even sadder to have an iconic toy store close up during what’s considered the happiest time of the year. However, the executives had to have been kept informed of their sales during the holiday rush, and they surely had time to analyze their figures after the new year.

But I guess we shouldn’t be surprised since the CEO gave himself 75% of his salary as a bonus and had a firm run by an acquaintance to draw up reasons why he deserved it. This was just three days before Toys R Us filed for bankruptcy.

That $2.8 million was a part of $8.2 million in bonuses for the company’s leadership, although this was reduced to an undisclosed amount during dates. And don’t forget the company wanted up to $32 million in bonuses just before Christmas to keep the executives “happy” during the season.

Lawyers for Toys R Us and associates have called the case “baseless and irresponsible” and that the case has already been settled.

According to Axiosthey also stated:

“So long as a company is not insolvent, its Board members owe a fiduciary duty to the company and its owners, and can take actions that benefit the owners to the detriment of the company.”

Yeah…I guess we’ll have to see if members of a jury agrees with them. However, the defendants are still pushing for the case to be thrown out, so who knows, maybe it will be. But that doesn’t mean the court of public opinion has to ever be tossed out. And in my opinion, the executives were certainly sleazy and raked in cash at others’ expense.

What is your opinion of leveraged buyouts? What do you think of Toys R Us’ actions in its final months? Have you checked out any of the Toys R Us mini-stores in Macy’s yet?

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