How Hurricane Irma Foreshadowed the Toys R Us Bankruptcy

Original Link | InvestmentU by Matthew Carr, Emerging Trends Strategist, The Oxford Club

Let’s talk about how powerful e-commerce is…

As Hurricane Irma barreled toward Florida, lots of my friends in the storm’s path went to hardware stores, grocery stores or big-box stores like Target (NYSE: TGT), saw the lines… and walked out.

They had an epiphany (the same one I have every day when I walk into a store and see a long line): They could order what they needed online.

And that’s what they did. They went to Amazon (Nasdaq: AMZN) and had all their emergency supplies delivered.

In this day and age, standing in line – emergency or not – doesn’t make sense to me.

It’s borderline arcane.

So it’s no surprise that the number of retailers planning store closures this year continues to increase. And the latest victim of its own inability to adapt is going bankrupt just in time for the holidays.


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Survival of the Fittest

Nowadays, it’s a daily occurrence to see headlines like “Millennials Are Killing This Industry” or “Millennials Are Destroying These Companies.”

Let’s be brutally honest… These are industries and companies that failed to adapt. They’re now withering away into nothingness because of the failures and shortsightedness of their management.

If they were good companies, they would have recognized their changing customer base.

This is capitalism at work. Survival of the fittest.

I used to work at Blockbuster. And it was one of several video rental stores I had memberships to.

I used to go to Circuit City for my computer equipment and printer needs.

And as a kid, I used to live for going to Toys R Us so I could blow the money I earned doing chores and random jobs on G.I. Joes, Transformers and Teenage Mutant Ninja Turtles action figures.

Blockbuster and its brethren were made obsolete by Netflix (Nasdaq: NFLX), Amazon Prime video, Hulu and a whole host of other services.

Circuit City was replaced by a bevy of competitors, which in turn are essentially being replaced by e-commerce. Even at Best Buy (NYSE: BBY), I feel that most people simply order products from the website after “showrooming.”

And I can’t even name anyone who’s actually gone to a toy store in recent years.

Toys R Us Goes Under

That’s why Toys R Us has joined Gordmans, Gymboree, hhgregg, The Limited, Payless ShoeSource, RadioShack (again), rue21, Wet Seal and more than 300 other retailers in filing for bankruptcy this year.

Already we’ve seen more than a 30% increase in retailer bankruptcy filings in 2017.

And they all made the same mistake – they realized too late how big of an impact e-commerce was going to have on their businesses.

In Toys R Us’ case, just over a decade ago, it was taken private for $7.5 billion in a leveraged buyout by Bain Capital, KKR & Co. (NYSE: KKR) and Vornado Realty Trust (NYSE: VNO).

For a while, things seemed okay.

In 2012, revenue peaked at $13.9 billion. But, like a lot of industries, the company was ultimately unable to fend off Amazon, as well as the likes of Target and Wal-Mart (NYSE: WMT). From 2012 to 2016, Toys R Us sales slipped 15%…

hurricane irma toys r us 1

Back in June, the company reported that same-store sales for its first quarter had declined 6.2%.

Faced with a heavy debt burden and fast-falling revenue, the toy company had few options. It was forced to file for bankruptcy protection earlier this week.

Ironically, this time of year is when retailers generally start seeing their business ramp up. We have the enormously important holiday shopping periods ahead us, from Halloween all the way to New Year’s. It’s a three-month consumer buying spree.

Last year, holiday spending grew a modest 4% to $658.3 billion. But online shopping grew nearly 13% to $122.9 billion.

On top of this, 13.7% of all toys were purchased online. That’s more than double the percentage in 2012, the peak year for Toys R Us. And more than 40% of Toys R Us’ annual sales come during the holiday season.

But more importantly, Amazon’s toy sales increased 24% last year to $4 billion. Brick-and-mortar competitors like Toys R Us simply can’t keep up with that growth rate.

If you’re looking for investment opportunities for the upcoming holiday season, take a lesson from the Hurricane Irma preppers. Don’t waste your time with brick-and-mortars, focus on digital and e-commerce businesses instead. You don’t need any more proof than the more than 300 retailers that have already filed for bankruptcy this year.


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