AMZN Amazon.com Inc

By Paul Ziobro and Lillian Rizzo 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 16, 2018).

The liquidation of Toys "R" Us Inc. has sent the toy industry reeling, leaving Mattel Inc., Hasbro Inc. and other manufacturers without a large chain devoted to selling games and dolls and forcing them to scramble to secure other outlets to carry their items.

Toys "R" Us, which had more than $11 billion in revenue in its last fiscal year, is one of the retail chains that were once seen by vendors as "category killers" and have emerged as crucial checks on the power of Amazon.com Inc. Stores like Best Buy Co. and Barnes & Noble Co. provide electronics manufacturers and book publishers with vast networks of physical showrooms.

The likely death of Toys "R" Us, which early Thursday filed plans to liquidate its U.S. operations and other businesses, means the $27 billion U.S. toy industry will no longer have a national partner to showcase its wares year-round, test experimental products and find the next Shopkins or ZhuZhu Pet.

It was a quick unraveling for Toys "R" Us since its September chapter 11 bankruptcy filing. In a call with employees Wednesday, Toys "R" Us Chief Executive David Brandon described a cascading series of events, starting with what he described as a "devastating" holiday season that led to plans to close more stores and then to exit from the baby-products business to focus on toys.

"The hole that we dug in the holiday season put us in a position where our lender became justifiably nervous as the company was continuing to consume cash," Mr. Brandon said.

Ultimately, the company is expected to liquidate its entire U.S. operation, a decision that would affect 33,000 jobs. The company also is liquidating operations in other countries, and plans to sell its business in Canada, Central Europe and Asia.

Now, 70 years after Charles Lazarus opened what would become America's main toy destination, its stores may disappear from U.S. soil.

"This industry has been devastated," said Tom Murdough, founder of Simplay3 Co., which makes plastic play sets and ridable vehicles. "This is a major, major hit to the industry."

In five decades of selling toys, Mr. Murdough hasn't known a day without Toys "R" Us. He founded and sold both Little Tikes Co. and Step2 Co. in the past and he now is the CEO of Simplay3, which he said gets between 20% and 30% of its sales through Toys "R" Us.

Toy makers don't anticipate recouping all of their sales this year, or ever, if Toys "R" Us goes away permanently without a replacement. UBS estimates that Hasbro would lose close to 3% of its sales for the year if Toys "R" Us liquidates, while Mattel stands to lose slightly more.

Hasbro CEO Brian Goldner said the maker of Nerf blasters and My Little Pony dolls is looking for new places to take its inventory. But that is more challenging earlier in the year compared with the end, when retailers are trying to fill shelves with holiday toys.

"There will be some disruption, more short term than long term, and then we move forward with growth," Mr. Goldner said at an investor conference this month.

The toy-industry growth rate could slump going forward, too. Toys "R" Us was primarily responsible for uncovering what would become the next big thing, since it took chances that other retailers avoided. "There aren't going to be as many breakout hits, not as many new items that can blossom," said BMO Capital Markets analyst Gerrick Johnson. "Toys 'R' Us was a testing ground for a lot of things."

Toy maker shares, including those of Mattel, Hasbro, Spin Master Corp. and Jakks Pacific Inc. were trading down slightly at midday Thursday.

Toy sales may be concentrated in the other two large retailers, Target Corp. and Walmart Inc., in the near term. Those mass retailers primarily sell the top-selling items instead of taking risks, Mr. Johnson said. That means market shares could also build among the larger toy companies, too. "Small companies won't have an opportunity to shine," he said.

Some toy companies have expanded their presence in unexpected places in recent years, so the blow isn't as bad as it might have been when Toys "R" Us held a larger share of the market. Jeremy Padawer, co-president of Wicked Cool Toys, the maker of Cabbage Patch dolls and Pokémon toys, says that not only has Amazon.com become a bigger part of its business, but sites like Zulily.com, retailers like Hallmark and even grocers and drugstores have become options to sell its toys.

Mr. Padawer said Wicked Cool is redoubling efforts to find new retail outlets, even though he doesn't expect to be able to replace all of its Toys "R" Us sales, which he estimates at 15% of the business, over the next year.

"While painful, we recognize there is an immediate opportunity to replace some of the business," Mr. Padawer said. "It will be a mutual dance between buyers seeking market share and opportunistic merchants."

Corrections & Amplifications Tom Murdough previously founded and sold a company called Little Tikes Co. An earlier version of this article incorrectly stated the name of the company was Little Tykes. (March 15, 2018)

Write to Paul Ziobro at Paul.Ziobro@wsj.com and Lillian Rizzo at Lillian.Rizzo@wsj.com

(END) Dow Jones Newswires

March 16, 2018 02:47 ET (06:47 GMT)

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