NEW YORK, (Reuters Breakingviews) - Toys R Us is officially broken. The retail chain is liquidating over 700 stores in the United States after it came up empty-handed in bankruptcy court. Although Amazon played a role, the woes were mainly self-inflicted. Plain old retail and financial risks sealed mascot Geoffrey the Giraffe’s fate.

In 2005, the Barbie-to-Lego purveyor was taken private by KKR, Bain Capital and Vornado Realty Trust in a $6.6 billion leveraged buyout. Few anticipated the financial crisis to come. Private equity’s forte is slashing costs and growing the top line. But from January 2005 to January 2017, annual selling, general and administration expenses grew by some $500 million while sales ticked up a measly $385 million. Adding to the challenges, Toys R Us was required to shell out roughly $500 million a year in interest. Long-term debt stands at more than six times last year’s EBITDA at some $4.6 billion. That explains why the firm posted a $36 million net loss in 2017.

The financial strain hurt in other ways, too. Amazon, Walmart and Target have gone aggressively after the toy category by slashing prices and ramping up their e-commerce efforts. It didn’t help that Toys R Us flubbed e-commerce early on by striking an ill-fated partnership with Amazon that foundered. And electronic devices have seized a growing share of kids’ time compared with dolls, toy cars and board games. Toys R Us should have been investing heavily to keep up with its rivals and consumer demands, but instead the company cut capital expenditure over the course of a decade.

Chief Executive Dave Brandon summed up the news as a “profoundly sad day” at the 70-year-old business. Nearly 30,000 jobs could be lost at the retailer, and toymakers like Hasbro warned of pain ahead.

The fallout may well spread beyond the toy aisle. Independent directors at department store Nordstrom last week rejected an offer to take the company private from its founding family, saying the below-market bid was too low. With Toys R Us demonstrating the risks of leverage in a turbulent retail sector, it may be wishful thinking to hope for a higher offer.

CONTEXT NEWS

- Toys R Us said on March 15 it is winding down its business by selling off its stock from 735 stores in the United States, putting at risk about 30,000 jobs. It is also undergoing a reorganization and sale process for its international operations.

- Dave Brandon, chairman and chief executive of Toys R Us said in a statement, “I am very disappointed with the result but we no longer have the financial support to continue the company’s U.S. operations.”

- The Wayne, New Jersey-based company filed for Chapter 11 bankruptcy protection in September.

- In 2005, KKR, Bain Capital and Vornado Realty Trust took the company private for $6.6 billion.

(Editing by Tom Buerkle and Ben Kellerman)

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