Retail

Weekend Pitch: Toys R Us comeback hinges on PE learning from mistakes

March 21, 2021
Toys R Us filed for Chapter 11 bankruptcy in 2017 after the company was unable to make its debt payments. (Justin Sullivan/Getty Images)

Greetings, Weekend Pitch readers. Adam Lewis here. You may recognize me from my coverage of the private equity industry for PitchBook News. And you may notice that I'm not Kevin Dowd, our longtime PitchBook editor and Weekend Pitch creator who recently rode off into the proverbial sunset so he could text me pictures of himself drinking beer and golfing on Wednesday afternoons.

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And now for my pitch ...

Resurrecting Toys R Us will be up to private equity. Gulp.


Private equity has had its share of high-profile flops over the years. Caesars Entertainment. Payless Shoe Source. Shopko. The list is extensive.

But one of the most painful failures came in September 2017, when Toys R Us filed for Chapter 11 bankruptcy protection, citing a mountain of debt brought on more than a decade earlier through a leveraged buyout by Bain Capital, KKR and Vornado Realty Trust. Creditors eventually opted to liquidate. More than 30,000 jobs were lost. Executives were more fortunate, with Toys R Us CEO Dave Brandon and his lieutenants earning millions in bonuses days before the company went belly up. Members of Congress took notice, eventually shaming Bain Capital and KKR into setting up a $20 million fund to pay out employees who were owed severance.

So color me skeptical when I saw that WHP Global, a brand acquisition and management firm backed by Los Angeles-based investor Oaktree Capital Management, announced earlier this week that it has acquired a majority stake in Tru Kids, the parent company of Toys R Us, Babies R Us and the Geoffrey the Giraffe brands.

What does that mean?

WHP has indicated it wants to re-open some Toys R Us stores before the holiday season, CNBC reported, though it didn't specify how many, where they would be located or if they would return to their previous form as giant department stores.

Toys R Us, while not technically dead, has been operating as a sort of zombie retailer in the US over the past few years after creditor Solus Alternative Asset Management and PE investor Ares Management bought the company's intellectual property out of bankruptcy. Led by current WHP CEO Yehuda Shmidman, who has also served as Toys R Us' vice chairman since 2019, the company tried a few pop-up locations, kiosks and an ill-fated distribution deal with Target. But those were ultimately shuttered after the pandemic hit.

There is good news for those hoping for a Toys R Us resurrection. For one, data from market research firm NPD Group shows that toy sales in the US surged 16% last year to over $25 billion, as parents tried to keep kids busy during the pandemic. And even though WHP Global has taken in $350 million from Oaktree Capital since launching in 2019, the brand operator hasn't shown signs of being in the traditional leveraged buyout business, where fiduciary obligation to shareholders typically outweighs everything. WHP has rung up more than $3 billion in retail sales across its portfolio of brands, which includes Anne Klein and Joseph Abboud, two high-end clothing companies.

More importantly, Toys R Us no longer has to deal with a debt load that eclipsed $5 billion at the time of its Chapter 11 filing, weighing down a business that was reportedly otherwise profitable. As a result, Shmidman and Co. can be more nimble, especially without a large stable of brick-and-mortar locations crippled by dwindling mall traffic.

That provides an opportunity for WHP—and Oaktree, by extension—to prove the private equity industry's long-held pitch that it can create jobs and still maintain a fiduciary duty to LPs. PE may even be able to show that its days of being Barbarians at the Gate are over. And it can help bring back Geoffrey the Giraffe to a generation of kids.

Here's to hoping PE proves the skeptics wrong.

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