Dive Brief:

• Toys R Us has hired law firm Kirkland & Ellis to advise it on options around restructuring the company's $400 million in debt due in 2018 — options that could include a possible bankruptcy filing, CNBC reported Wednesday citing unnamed sources familiar with the situation.
• CNBC pointed out that tackling the toy retailer's debt load could "give its major vendors such as Mattel and Hasbro clarity into the company's long-term viability to help ensure the toymakers continue to stock its shelves throughout the holidays." Toys R Us has said in regulatory filings that it has also hired the financial advisory firm Lazard to help the company address its debt and upcoming maturities.
• The retailer wouldn't confirm it had hired Kirkland & Ellis, though CNBC, Bloomberg, Reuters, The New York Times and The Wall Street Journal all reported on it independently. In a statement, a Toys R Us spokesperson told Retail Dive, "As we previously discussed on our first quarter earnings call, Toys R Us is evaluating a range of alternatives to address our 2018 debt maturities, which may include the possibility of obtaining additional financing." The spokesperson added that executives will provide more information on these activities during the retailer's second quarter conference call on Sept. 26.

Dive Insight:

Toys R Us isn't an apparel retailer, but many of the problems facing the company look like those of apparel sellers going bankrupt this year.

To begin with, the toy retailer has grappled with "a multi-decade onslaught of competition from discounters such as Walmart and Target, and more recently, online only players such as Amazon, leading to market share losses," according to Fitch Ratings. As analysts with the debt rating firm pointed out in a note on Wednesday, the commodity-like and cyclical nature of toys — they don't need much sales assistance — make them attractive products for discounters and online players.

Toys R Us has also fallen behind other retailers in its e-commerce sales and omnichannel capabilities. Fitch analysts wrote Wednesday that the retailer "needs to invest further to improve its price perception and build out its omnichannel infrastructure." They added that Toys R Us' "current online penetration, at approximately 16.8% and 13% of domestic and total revenue in 2016, respectively, lags the overall industry, especially in its core categories."

Making those sorts of investments is tough when a retailer is on the hook for $3.5 billion over the next three years, much of it a legacy of a leveraged buyout by private equity firms.

"For a robust retailer, debt payments can be challenging," Neil Saunders, managing director of GlobalData Retail, said in comments emailed to Retail Dive. "For a retailer struggling to generate sales growth while, at the same time, trying to invest to remain relevant — it can be the difference between success and failure."

In Saunders' view, Toys R Us faces a "pincer movement" — flanked on one side by online sellers and retail "generalists" who discount toys to drive traffic, forcing the retailer to price match or lose sales, and at the same time falling behind in digital competitiveness. "Although recent digital investments have been made, the website and general e-commerce proposition are still below par," Saunders said. "By our calculations, Toys R Us continues to lose online market share in toys."

Saunders points out that just because Toys R Us has hired restructuring advisers doesn't mean that bankruptcy is imminent, but the company is "in a very uncomfortable financial position." That, in his view, can largely be attributed to the company's private equity owners, Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust. "In our view, this is an example of private equity damaging retailers by not running them as commercial trading entities but as ATMs," he said.

Yet while the retailer's debt load is high, the company's immediate financial situation had not seemed particularly dire. Debtwire retail analyst Philip Emma pointed out in an interview with Retail Dive that the company, from the outside, seemed to have the cash and borrowing capacity to meet next year's debt maturity, which is relatively low compared to the $2.6 billion due in 2019. Moreover, S&P and Moody's Investors Service have given the retailer B-level long-term ratings, and Toys R Us' bonds have been trading at face value, rather than with the sort of premiums on bonds for companies on the brink of bankruptcy, Emma said.

"The amount of debt they have to deal with immediately is relatively small in the grand scheme of things," Emma said, adding that Toys R Us "didn't have the dynamics of a company where people are starting to ask about restructuring."

This story is part of our ongoing coverage of the 2017 holiday shopping season. You can browse our holiday page and sign up for our holiday newsletter for more stories.