While the Seattle-based online retailer saw its toy segment sales jump an impressive 24% versus just 5% for the overall market, once-market-leader Toys R Us has posted a disappointing five years of decline. (See also: 5 Companies Amazon Is Killing.)
Wal-Mart, Target Step Up Digital Game
The Wayne, N.J.-based retailer’s $5 billion debt load, alongside its rapidly decelerating sales, have made it extremely hard for Toys R Us to invest enough to compete on the booming digital front. At the same time, cash-rich rivals such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) have funneled capital into taking over their competitors, investing billions of dollars in efforts to lower prices and improve their online sales amid the Amazon-led ecommerce revolution. In August, Wal-Mart spent $3.3 billion to buyout Jet.com, later announcing the acquisition of three more online retailers.
With so much debt on its hands, Toys R Us faces increasingly cautious lenders. Further, tighter margins online make investments harder to justify. Investors worry Toys R Us could slip down the same slope as Macy’s Inc. (M), which last year promised to improve its performance and use cash to pay down its debt. With $5.5 billion in net debt at the end of Q1, Macy’s was forced to use two thirds of its free cash flow to pay off $750 million in maturing debt, while buying back more to stay relevant in a disrupted retail space.
The Cost of Debt
The Wall Street Journal notes that while struggling chains can likely survive for years, their options have been significantly cut as they focus on paying off debt. As a result, Toys R Us and its beaten-down brick-and-mortar peers will likely lag behind their competitors.
In June, S&P Global Ratings lowered its outlook for the retailer, warning that it might not be able to pay off a new high interest, longer-term debt that it swapped for an existing one earlier this year. (See also: Amazon Could Be Apple’s Size Within 12 Months: Analyst.)
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