Before Christmas we reported on the struggles faced by the UK arm of Toys ‘R’ Us, and in particular what seemed like a last minute saving grace for the retailer in the form of a Company Voluntary Arrangement (CVA). Despite the CVA proposals having been approved, it appears that the retailer’s financial situation is set to further deteriorate as HMRC has just hit the company with a £15 million VAT bill. Toys ‘R’ Us has until 27 February to pay, or it will have no choice but to enter administration.
Although the success of the CVA proposals provided a glimmer of hope for Toys ‘R’ Us, it may not have been enough to ensure its survival. The proposals were primarily focussed on making the retailer’s property portfolio more viable by downsizing and reducing rental costs associated with large “warehouse-style” stores. As a result, the CVA dealt exclusively with compromising the claims of landlords, rather than addressing the retailer’s general body of creditors (including HMRC).
Given that the HMRC deadline is looming, the pressure on the retailer’s advisors to secure a rescue deal with investors is higher than ever. There have been reports that fellow toyshop giant, The Entertainer, and turnaround fund, Hilco Capital, are amongst those who have indicated an interest in Toys ‘R’ Us. However, these talks may now be under threat given that any investor would need to be willing to foot the £15 million bill.
Toys ‘R’ Us is just one of many retailers that have run into financial problems following a dreary Christmas trading period, with high street giants such as Debenhams and House of Fraser having also announced a number of store closures. Reports have emerged just this week that one of the UK’s largest electronic retailers, Maplin, is under the threat of administration following a fall in profits and is currently in talks with potential investors.
The fate of Toys ‘R’ Us is uncertain and a reminder for many retailers that although downsizing a property portfolio may be a good place to start, attention should also be given to other sources of debt that could put a business under pressure very quickly.