The toy chain, hobbled by $5 billion in debt and more intense competition, filed for protection from its creditors ahead of the key holiday season. Like so many retailers that find it harder to co-exist with Amazon, analysts say Toys R Us needs to improve its online services and offering special experiences in the stores.
For Toys R Us, that might be game demonstrations or hosting birthday parties. It says it'll keep its 1,600 Toys R Us and Babies R Us stores open, and keep serving customers while in bankruptcy. Still, the chain faces hurdles — price is a big issue for shoppers, and Toys R Us acknowledges that it can't compete there.
"We will go to Toys R Us to check out the current toys, and while we are at the store, we will be looking up prices on the phone on Walmart.com and Amazon," said Randy Watson of Fort Worth, Texas. He used to pick up items at Toys R Us for his kids. But for his grandchildren, he uses the store to see what's available and then shops elsewhere to get lower prices.
The bankruptcies of nearly three dozen retailers since the beginning of the year — many of them very small companies, but also well-known names like Payless Shoe Source, Gymboree Corp. and True Religion jeans — has resulted in job losses and store closings. Toys R Us didn't say if it would trim its workforce of nearly 65,000 employees worldwide.
Credit Suisse believes that there could be 8,640 store closings this year, which would surpass the 2008 peak of 6,200. In 2008, the number of bankruptcies was at a historic high of 569, according to S&P Global Market Intelligence.
Amazon, meanwhile, has been using its $99-a year-Prime Membership as a way to gain fierce shopper loyalty as it adds more perks like same-day delivery Amazon Now for a growing number of markets. It's also making partnerships with brands like Sears and Kohl's, and now has hundreds of Whole Foods stores that it could use as distribution points.
"Amazon has the level of convenience that so far surpasses the ability of traditional retailers can offer," said Karl Havard, a retail industry expert for PA Consulting Group, a global retail consultancy. "There's a lot of inertia in the retail boardroom. They're not prepared to take the risk."
Toys R Us was a major force in toy retailing in the 1980s and early 1990s, and was one of the first of the "category killers" — retailers that focused on one merchandising category and offered low prices. That combination hurt mom-and pop shops that couldn't compete on breadth of inventory or price.
But like its peers, the now-defunct Sports Authority, Borders and Circuit City, Toys R Us started losing shoppers to discounters like Walmart and Target, and then to Amazon. GlobalData Retail estimates that about 13.7 percent of toy sales were made online in 2016, up from 6.5 percent five years ago. And Toys R Us has also been hurt by children shifting to mobile devices as playthings.
But the toy industry still needs Toys R Us, says Jim Silver, editor-in-chief of the toy review website TTPM. He cites the fact that it sells toys all year, rather than just at the holidays, and has helped launch toy crazes such as ZhuZhu Pets during the downturn.
"If toy companies lost Toys R Us, it would be a hardship for a lot of companies," said Silver. Toys R Us has also struggled with debt since private-equity firms Bain Capital, KKR & Co. and Vornado Realty Trust took it private in a $6.6 billion leveraged buyout in 2005. The plan had been to take the company public, but that never happened because of its weak financial performance.
With such debt levels, Toys R Us has not had the financial flexibility to invest in its business. Marc Rosenberg, a toy marketing executive, said it hasn't been aggressive about building its online business, and let those sales migrate to rivals.
Toys R Us said the bankruptcy proceedings are a way for it to work with its creditors on restructuring its debt and will give it greater financial flexibility. The company said it's "well-stocked as we prepare for the holiday season and are excited about all of our upcoming in-store events."
What shoppers find on the shelves might be a question. Lawyers for Toys R Us said in court Tuesday that within a week of a news story about the possibility of bankruptcy, nearly 40 percent of the company's suppliers refused to ship products without cash on delivery. That accelerated the bankruptcy filing.
Jefferies analyst Stephanie Wissink said she expects that Toys R Us suppliers will continue to shift some orders to other retailers. For most multinational toy suppliers, the Toys R Us business roughly accounted for 10 percent of total sales, she said.
The issue isn't that people aren't buying toys. U.S. toy sales rose 6 percent last year on top of a 7 percent increase in the prior year, says NPD Group Inc., a market research firm. That was the biggest increase since 1999 and was fueled by several blockbuster movies.
But for the first half of 2017, sales rose 3 percent. That puts more pressure on the later part of the year, when most toy sales occur, for the industry to meet NPD's estimate for a 4.5 percent annual increase. Lego is laying off 1,400 workers after saying profits and sales dropped in the first half. And the nation's two largest toy makers, Mattel and Hasbro, reported disappointing second-quarter results.
Toys R Us, based in Wayne, New Jersey, made its filing in the U.S. Bankruptcy Court for the Eastern District of Virginia, and said its Canadian subsidiary would seek similar protection through a court in Ontario. The company said separate operations outside the U.S. and Canada are not part of the filings and its online sales sites worldwide remain open for business.
Toys R Us said it expects to continue honoring return policies, warranties and gift cards, and customer loyalty programs.
Associated Press reporter Bill Cormier in Atlanta contributed to this report.