Toys ‘R’ Us to shrink portfolio

As Toys ‘R’ Us in the US considers filing for bankruptcy, the UK arm of its business is looking to downsize its portfolio to save money ahead of debt repayments. Toys ‘R’ Us in the UK operates as a subsidiary of the US parent company, Toys ‘R’ Us Holdings Group, which is owned by Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust. In the US it has instructed lawyers to explore restructuring options, including filing for bankruptcy. It is working with Kirkland & Ellis to address the $5bn (£3.8bn) of debt – $400m of which is due next year – it has in the US business. Although the UK and US businesses are run as separate subsidiaries, in the UK it is similarly looking for opportunities to improve its balance sheet against the backdrop of a challenging market and increased competition from e-commerce companies. The big-box toy retailer has £260m of debt secured against its UK freehold estate – 29 stores and a distribution centre. The debt is from a CMBS loan it agreed in 2013 and is due to be repaid in 2020. “Toys ‘R’ Us as a group has been facing a few challenges for some time. In the UK it’s true that it’s up against Amazon, but also Argos and the major supermarket groups,” says Richard Perks, director of retail research at Mintel. Skewed towards Christmas trade “The problem for a company like Toys ‘R’ Us is that the business is very highly skewed to Christmas trade, so it’s really only over Christmas that it can fully justify all the space it has. At other times of the year its competitors can give the space to other products. Toys ‘R’ Us does not have that flexibility,” he adds. Toys ‘R’ US has 100 stores in the UK, covering at least 2m sq ft. The majority of its stores are on retail parks or individual sites adjoining retail parks and range from around 15,000 sq ft to 50,000 sq ft. However, much of its estate is no longer fit for purpose and is viewed as being too large and outdated. Cushman & Wakefield is working alongside the chain’s in-house real estate team to identify opportunities to reconfigure the stores. A spokesman for Toys ‘R’ Us said: “Decisions regarding our store portfolio will continue to be made based on what makes the best business sense. For any retailer of our size, these changes do occur from time to time as part of our normal course of business.” Four reconfigurations It has already completed four reconfigurations – in Portsmouth, Hampshire; Stevenage, Hertfordshire; Ilford; east London; and Luton, Bedfordshire. In these instances it identified opportunities where it had upcoming lease expiries and worked with the landlord to reconfigure and sublet the surplus space to new retailers, including TK Maxx, M&S and Aldi. It has only done this in leasehold stores and with landlords that are willing to invest to configure the space, which can cost at least £750,000. The newly configured space is best suited to retailers, such as Wickes, Matalan and B&M, which can operate out-of-town from around 20,000 sq ft. As many of Toys ‘R’ Us’s larger stores sit on separate sites adjoining retail parks, landlords would need to consider which retailers would be able to operate without benefiting from the critical mass and subsequent footfall of being in a retail park with multiple tenants. So far, the retailer has not taken any action on its freehold estate, against which its debt is secured. However, there is a lot of value held in the estate with many of its stores sitting on prime development land, particularly around London. Its Old Kent Road store, for example, sits within the Old Kent Road Area Action Plan and on a site needed for the proposed Bakerloo Line extension. Recent performance Toys ‘R’ Us in the UK posted its first profit in four years in its latest results following a cost-cutting review across its business. It posted an 82% jump in pretax profits to £42.7m in the 12 months to January 28. Its operating profit also increased from £8m to £21.3m. However, sales fell by 4% in the period to £418m. According to documents filed at Companies House, the improvement was down to reducing its distribution and administrative costs. To send feedback, e-mail amber.rolt@egi.co.uk or tweet @AmberRoltEG or @estatesgazette