Toys R Us (Long Trickle-Down Effects): Mattel & Hasbro

Toy Suppliers Get Hammered by Toys R Us Bankruptcy

Callback to the Toys R Us bankruptcy whereMattel Inc. ($MAT) was listed as one of the toy behemoth's largest unsecured creditors, owed a staggering $135.6mm. Notably, that was a big enough loss for Mattel to agree to sit on the DOJ-appointed official committee of unsecured creditors. For the uninitiated, that's a committee with fiduciary responsibilities to similarly situated unsecured creditors: it's a time commitment. Why do we mention this? Well, Mattel reported earnings this week and...they...were...pretty, pretty, PRETTY brutal. Quick recap: 13% sales decline. 22% domestic sales decline (half of which they directly attributed to Toys R Us). Those creepy-a$$ American Girl dolls? Down 30%. Consequently, the company announced a dividend suspension and a $650mm expense reduction; it also announced that it will explore the capital markets for an asset-based loan and lever up its balance sheet. So, in summary, here is this "disruption" illustrated:

Boatload of LBO-based debt 💰 + "Amazon Effect" = 😱  Toys R Us Bankruptcy 😱  = Mattel Inc. $135mm claim + 22% ⬇️  in domestic sales (American Girl ⬇️ , Barbie ⬇️ , Hot Wheels ⬇️ ) = Mattel stockholder/dividend-seeker 💩 = Mattel employees & supply chain ⬇️❗️= ABL lender💰💰💰❗️ = Kids don't care because video games are 🔥🔥  = Toys R Us & Mattel death spiral❓ 

Suffice it to say, Jefferies is skeptical about the turnaround plan. Finally, we should note that Hasbro Inc. ($HAS) also reported a 5% hit because of Toys R Us; it was the third largest unsecured creditor in bankruptcy to the tune of $59mm. Despite this, the stock went up on revenue and profit beats (thank you, Luke Skywalker, you're they're only hope).

Fallout from Toys R US & More Distressed Retail

Blah, Blah, Private Equity = Death to Retail?

Courtesy of the New Yorker, some more Toys "R" Us history here. Mattel ($MAT) had to amend its credit agreement, reflecting significant leverage ratio uncertainty after the Toys "R" Us bankruptcy filing. Jakks Pacific Inc. ($JAKK) reported that it now expects a net loss in '17 and then, as if to pour salt on the wound, the ratings agencies unleashed a downgrade. Folks are getting increasingly nervous about the retail fallout amidst conflicting reports about store closures/openingsPETITION NOTE: lost in all the noise around Toys is that their new business plan calls for increased employee wages - implying a belief that Walmart's ($WMT) wage increases have helped Walmart provide a better "experience."  PETITION NOTE II: It appears that the lenders firmly believe that comparisons between Toys "R" Us and (liquidated) Circuit City are misplaced. Toys is THE LAST LARGE free-standing toy seller. Circuit City was generally expendable given that, at the time, the space was considered saturated and uber-competitive. Now, Best Buy ($BBY - up ~26% YTD, which is down after cratering the other day) fills that void. Just like Barnes & Noble ($BKS - down ~37% YTD) fills the (physical) book void (well, at least until Amazon book stores sprout in force - already it's popping up in New York and LA). And Dick's Sporting Goods ($DKS - down ~50% YTD) now has significant sporting goods market share. We're not saying WE would invest on this "LAST" basis because we wouldn't be caught dead with DKS, BKS or BBY in the PETITION 401(K); but, we are saying that the lenders appear to be lending, at least in part, on that basis. And word is that the DIP is over-subscribed (and Reorg Researchcaptures how lenders are clamoring for inclusion). Meanwhile, the list of distressed retailers seems to grow by the day: note: Belk Inc.Fresh MarketBi-Lo99 Cents Only Stores and more (blah blah, private equity). But, to put an exclamation point on this, see, "Private equity drove Toys "R" Us into bankruptcy, sure, but that isn't quite the same thing as destroying it."