It's only the second month into 2017 but it doesn't appear that this year will be a great one for Toys "R" Us.
After a weak holiday season for toy sales and even more so for the broader retail sector, the toy seller was forced to lay off between 10% to 15% of its corporate employees, as was first reported by The Wall Street Journal. Last Friday, 250 Toys "R" Us employees at the company's Wayne, N.J. headquarters received termination letters.
So now, several big questions loom large.
Will Toys "R" Us be the next retailer to succumb to massive store closures in the same vein as Macy's (M) and Sears Holdings Corp. (SHLD) ? Or, could it possibly even go bankrupt such as The Sports Authority did last year?
Toys "R" Us is quick to dispel it's in trouble.
"We, like many other retailers, must continually look for opportunities to work more efficiently and effectively, particularly as customer shopping patterns are evolving. The recent changes are not just about cost-containment - our growth plans require us to have the right structure, talent and determination to transform our business and achieve the financial objectives we've set for the company," a Toys "R" Us spokeswoman told TheStreet via email.
Here are three signs that show Toys "R" Us may be headed down a dark path.
Comparable store sales are slipping.
For the nine-week period ended Dec. 31, also known as the key holiday period that is supposed to reap massive sales for the company, same-store sales dropped 2.5% in the U.S. and 4.9% internationally. Toys "R" Us CEO Dave Brandon said in a statement in January that the weakness was a reflection of an overall 7% decline in toy sales in North America, according to NPD Group data, during the holiday season coupled with increased pressure from e-commerce rivals. He said the company would "take aggressive action" on driving new initiatives to increase sales such as relaunching its web-store.
A major toy maker is struggling mightily.
Mattel's (MAT) poor fourth quarter earnings may also signal that Toys "R" Us is in bad shape. We can't place all the blame on the retailer for not moving enough Barbie units, however, as the toy maker's stock price has fallen 38% in the last three years. But, in its latest quarter, Mattel said revenue fell sharply by 8% to $1.83 billion, with a 2% slip in Barbie sales alone - despite a notable transformation of the doll that seemed to resonate well with consumers. Mattel saw a 7% drop in all North America revenue and globally, its net sales fell 4%.
If Mattel's struggles persist, it would be bad news for Toys "R" Us.
The company's debt is under pressure.
Meanwhile, Toys "R" Us has accrued $5.56 billion in long-term and short-term debt, according to data compiled by Bloomberg. The company's debt, a revolving credit facility, due 2020 traded down to 84 cents on Wednesday afternoon, a 10.6% decline from its peak of 92 cents in December, according to data reviewed by TheStreet. In effect, the market is growing concerned about the ability of Toys "R" Us to pay its future obligations.