Toys "R" Us Canada sought creditor protection largely due to the financial woes of its U.S. parent company, which filed for bankruptcy, but consumers may still be wary of its Canadian stores due to the hit to the global brand's reputation, experts say.
Retail analyst Bruce Winder says Canadian consumers may hesitate to shop at Toys "R" Us this fall, worrying about whether they will be able to access product warranties or return items in the coming months.
"What customers hear is that Toys "R" Us is in bankruptcy protection, or going bankrupt," said Winder, who is the co-founder and partner of Retail Advisors Network.
"They won't be able to differentiate that Canada or the U.S. is profitable."
Toys "R" Us Canada was granted creditor protection in Ontario Superior Court under the Companies' Creditors Arrangement Act on Tuesday, one day after Toys "R" Us started bankruptcy proceedings south of the border.
The Canadian subsidiary said in court documents filed Tuesday that it is performing well financially, with net earnings doubling and sales revenues increasing at a compounded annual rate of 5 per cent over the last three years.
The Canadian arm, operating legally under the name Toys Canada, does not have any obligation to its parent company's Chapter 11 debtors, it added. However, the bankruptcy proceedings south of the border resulted in a default and termination of the company's loan facilities – including the main source of financing for Toys "R" Us Canada, the filings said. In turn, the Canadian subsidiary was required to repay the outstanding loans, which it is not in a position to do.
"Toys Canada has been cut-off from its primary source of financing during the midst of its inventory build for the holiday season," it said in the court documents.
"Without creditor protection and access to 1/8 debtor-in-possession 3/8 financing, Toys Canada will lack sufficient liquidity to operate its business in the normal course within approximately two weeks."
Toys "R" Us Canada has now secured interim debtor-in-possession financing from a new group of lenders led by JPMorgan Chase Bank, including a US$200-million term loan and US$300-million revolving credit facility, it said.
The Canadian subsidiary says the "breathing room" afforded by the creditor protection and new financing will facilitate continued operation of its 82 stores across Canada, as well as its e-commerce websites, as the company restructures.
Melanie Teed-Murch, president of Toys "R" Us and Babies "R" Us Canada, said in a statement on Tuesday that it would continue to honour all gift cards, warranties and returns as normal.
"The restructuring is intended to facilitate the continued success of our iconic brands; building a stronger company for our customers, business partners and team members.... We are confident that this process will enable us to leverage Toys "R" Us' existing strengths to succeed."
The retailer's Canadian arm was already feeling the pinch from its U.S. parent company's struggles before initiating proceedings on both sides of the border.
Toys "R" Us Canada said in the court filings that a number of its suppliers have recently "sought to reduce their potential exposure" by "requiring deposits, cash on delivery or compressed payment terms."
Winder says vendors may also start to ship reduced amounts to the retailer in a bid to protect themselves, resulting in thinner shelves and further sending a negative signal to customers.
Alfonso Nocilla, a law lecturer at the University of Western Ontario, also said the toy chain's Canadian arm may be impacted by "potential damage to the brand name" as the company goes through the restructuring process.
Still, although the toy chain's U.S. parent company may try to tap assets in Canada to pay off its creditors, it will want to avoid disruption in its Canadian subsidiary, he said.
"To the extent that the Canadian operations remain profitable, and that the stores are doing well, practically speaking... they're going to want to protect that and enhance that."
