5 reasons Toys R Us failed to survive bankruptcy

Nathan Bomey | USA TODAY

Show Caption Hide Caption Your Toys R Us shopping questions answered Looking for going out of businesses deals? Got unused gift cards? Here's what shoppers need to know as Toys R Us shuts down its stores.

The sudden implosion of Toys R Us came about six months after the company sketched out an ambitious reinvestment plan to get back on its feet by using bankruptcy to achieve a fresh start.

What happened?

Toys R Us confirmed Thursday that it plans to close all of its U.S. stores, barring a last-second deal to keep the 200 best locations alive, after its best-laid plans to survive Chapter 11 went awry.

Just a few months ago, Toys R Us CEO David Brandon had mapped out a goal of upgrading online sales, renovating stores and introducing augmented reality into the shopping experience.

Yes, a couple hundred stores were set to close to help the rest get healthy. But closing them all? That was never in the cards.

So the company's sharp pivot from reorganization to liquidation was a stunning turn of events.

Looking back, however, the pitfalls that tripped up Toys R Us are clearer:

1. The company's debts were too much to bear.

Toys R Us was saddled with heavy debt acquired when Bain Capital and other firms took the company private in 2005.

By the time the company was approaching bankruptcy in 2017, it still had about $5 billion in liabilities.

Those debt payments turned out to be a metaphorical anchor around mascot Geoffrey the Giraffe's long neck.

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Toys R Us was "starting at an inherent disadvantage because of the debt load," said Douglas C. Bernstein, a Plunkett Cooney bankruptcy attorney who was not involved in the case.

2. Terrible timing.

That Toys R Us filed for bankruptcy in September instead of shortly after the holiday shopping season turned out to be disastrous. It was extremely bad luck.

During a period in which the company needed to focus primarily on executing a strong holiday season, the bankruptcy case was an epic distraction.

And not just for executives and employees. For customers, too.

Yes, Americans are accustomed to frequenting bankrupt companies — multiple airlines and car companies have survived bankruptcies, and the reliability of their services is much more crucial than good toys.

But in an industry in which returns are key and gift cards are increasingly important, any reason for questioning a retailer's future during the holiday is enough to shop elsewhere.

And for good reason. Toys R Us is now accepting gift cards through only mid-April.

Filing for bankruptcy after the holidays would have been more ideal. But the company's hand was effectively forced after rumors of struggles caused suppliers to temporarily tighten up product terms for fear of suffering heavy losses.

3. Competitors turned up the heat.

The demise of Toys R Us is just another a reminder that retail is a brutally competitive business.

When Toys R Us was down for the count, the company's chief competitors smelled blood in the water.

Amazon, Walmart and Target all ratcheted up toy discounts during the holidays, Toys R Us said in a court filing.

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Those discounts helped finish off Toys R Us at a time when it badly needed to pile up profits, the company said.

Amazon, Walmart and Target priced toys "at low-margins or as loss-leaders" during the holiday shopping season and offered aggressive online shipping options, Toys R Us said in a court filing.

The retailer simply "could not compete" with those prices because it relies "exclusively on toys for profit."

"The holiday season was disastrous" for Toys R Us, Debtwire analyst Joshua Friedman said. "It sort of killed any hope for a reorganized, whole Toys R Us."

4. Vendors got skittish.

In retail, nervousness is contagious.

Although details were unclear, Toys R Us said it faced unexpected "delays and disruptions" in product supplies during its bankruptcy.

As the company teetered, vendors apparently worried that the company would not make good on payments it had promised.

That's a recipe for a snowballing crisis in retail.

For creditors that realize their investment is doomed, "it’s better to take your lumps today rather than kick the can down the road with the hope that things get better in a few years," Bernstein said.

5. This time was different.

With the bankruptcy filing occurring in September, the holiday shopping season was always likely to be absolutely critical for Toys R Us.

And it was. But the 2017 holiday shopping season was different than any other.

Between Thanksgiving and Christmas, Toys R Us said it typically would fare "well against the competition because of significant inventory offerings" and "a strategy of selling late at high margins after competitors sell out of 'hot' inventory and attracting last-minute shoppers who fear that online deliveries will not be made in time."

Not this time.

"This year, however, was different," Toys R Us said. "As a result of a general decline in toy sales, competitors had full product offerings through the end of the holiday season and same-day and two-day delivery guarantees eased customer fears regarding online shopping."

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.