When the last Toys ‘R’ Us store closes its doors once as well as for all, the company’s top executives will have pocketed some $8.2 million in retention bonuses for sticking around long enough to liquidate the company. Wall Street firms in which loaded Toys ‘R’ Us with debt when they bought in which in 2005 will have collected millions in fees through the company, even if they ultimately lost the majority of their investment. as well as employees like Ann Marie Reinhart, who worked as a supervisor at Toys ‘R’ Us for 29 years, will walk away with nothing.
Reinhart, 58, was a full-time supervisor at a Toys ‘R’ Us store in Durham, North Carolina, until she was laid off when her store closed in early April. Because Toys ‘R’ Us didn’t give her or her coworkers any severance, Reinhart can be looking for a job as well as getting by on the wages her husband earns delivering auto parts.
“We can’t survive on his salary very long,” she said. “We’ve already dipped into our savings to pay bills.”
Reinhart can be among the chain’s 30,000 employees who found out they would likely be laid off without severance when Toys ‘R’ Us announced in which would likely close 735 stores within the US after failing to recover through bankruptcy. The company told workers in a March letter reviewed by BuzzFeed News in which in which has no money to pay severance — however even if in which did develop the cash, federal labor law doesn’t obligate in which to do so.
Toys ‘R’ Us’s epic collapse illuminates Wall Street’s role within the retail apocalypse in which has prompted a string of bankruptcies at private equity–backed retail companies, through Nine West, bought by Sycamore Partners in 2014, to Claire’s, bought by Apollo Management in 2007. Thirty-three percent of retail job losses through 2016 through 2017 resulted through private equity–backed store closures, according to a report through Inflection Capital Management, an equity management consulting firm. As the retail industry confronts the rise of e-commerce as well as rapidly changing consumer behaviors, many companies in which took on debt in private equity buyouts to acquire cash are folding.
“in which seems likely we’re about to see lots more bankruptcies like Toys ‘R’ Us, which means trouble for low-wage workers.”
“To be in retail currently, you need to be unique; you need to offer something you can’t get online. as well as typically private equity firms tend to cut back,” Josh Kosman, author of The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, told BuzzFeed News. “They’re not improving their stores as well as their product lines because the companies they buy have so much debt. So they’re not well-positioned to survive Amazon. as well as the consequences are, if revenue continues to fall, ultimately they will probably collapse.”
As some other private equity–backed companies like Toys ‘R’ Us fail to pay down debt in a rapidly changing retail environment, experts are predicting in which more minimum-wage retail workers may soon find themselves without jobs.
“The retail industry can be within the cross-hairs of private equity, given its declining profit margins as well as the increasing dominance of online retailers like Amazon. however here’s the big problem. Retail jobs account for a large portion of low-wage jobs in America. in which seems likely we’re about to see lots more bankruptcies like Toys ‘R’ Us, which means trouble for low-wage workers,” former US labor secretary Robert Reich told BuzzFeed News.
Private equity buyouts in retail like Toys ‘R’ Us’s increased within the early ’00s, when struggling retailers, including Sports Authority, Claire’s, as well as Payless ShoeSource, turned to private equity firms for completely new ownership.
When a company sells itself to a private equity fund, in which takes on a high-interest loan with hopes in which the completely new owners will drive enough profit growth to pay off the debt. in which’s like taking on a high-interest payday loan. When private equity buyouts go well, they can help a company cut operations costs to maximize profits. however if the company doesn’t trim down its debt, the financial burden “becomes so unsurmountable you can’t get yourself out of in which,” Farla Efros, president of the consulting firm HRC Retail Advisory, told BuzzFeed News.
Retailers have made up only 9% of major private equity buyouts within the last decade, however they accounted for 17% of Chapter 11 bankruptcies of private equity–backed companies within the last six years, according to a January report through the international financial services advisory firm FTI Consulting. Toys ‘R’ Us can be just one of the biggest retailers to fold.
In July 2005, after struggling for years to compete with big-box retailers like Kmart, Walmart, as well as Target, Toys ‘R’ Us agreed to a $6.6 billion private equity buyout deal with KKR, Bain Capital, as well as Vornado Realty Trust within the hopes in which would likely help turn the company around.
The fund spent $1.3 billion of its own money as well as saddled the company with $5 billion more in debt to buy out the ailing retailer. At the time, John Eyler, the company’s chief executive, optimistically said the deal would likely mean “Toys ‘R’ Us can be going to be around for a long time.”
After its buyout, Toys ‘R’ Us reorganized its corporate structure. in which planned to lower operating costs by closing underperforming stores, licensing some offshore stores, as well as selling some of its real estate to raise cash as well as repay the debt. however trimming back operating expenses meant shifts at the stores were often understaffed, as well as employees say Toys ‘R’ Us suffered as a result.
Alisha Hudson was pregnant when she started out a part-time job at Babies ‘R’ Us in 2016. She told BuzzFeed News in which managers often asked her to stay late at the last minute to help cover shifts, as well as in which she worked anywhere through 36 to 40 hours a week.
“Corporate was very stingy with their hours as well as their money,” Hudson said. “They would likely think we could run with less people than we actually needed.”
“The current owners purchased Toys ‘R’ Us, as well as since then in which had slowly gone downhill,” Michael Beymer, who has worked at Toys ‘R’ Us in Tulsa, Oklahoma, for 27 years, told BuzzFeed News.
Beymer said managers were more focused on increasing credit card applications as well as buyer protection purchases. “in which took away time through doing what you need to do, like helping the customers as well as answering their questions,” he said.
By the time Toys ‘R’ Us filed for Chapter 11 bankruptcy in September, the company estimated its debt at more than $5 billion, as well as in which was paying $400 million a year in interest on the debt. Its debt load as well as fees equaled nearly half its sales, according to its 2016 annual report. as well as after holiday sales were “well below worst-case projections,” in which announced in March in which in which would likely be closing its stores.
Toys ‘R’ Us told BuzzFeed News in which in which gave all employees 60 days’ notice, which can be required under federal law, as well as pay as well as benefits for the duration of their employment. “We are also doing whatever we can to help employees transition, including job fairs as well as connecting them to resources available within the various local markets,” in which added.
For many employees, the company’s efforts have not been enough.
“I don’t think a lot of people realize in which when you’re paycheck-to-paycheck, you are very close to the edge,” Mikey Fox, an employee at the Toys ‘R’ Us in Eugene, Oregon, told BuzzFeed News. “When you’re in which close to minimum wage already, a few weeks of extra pay will help with in which transition period.”
“I don’t think a lot of people realize in which when you’re paycheck-to-paycheck, you are very close to the edge.”
Fox has worked part-time at Toys ‘R’ Us on-as well as-off since 1988 as well as depends on the $12.73 an hour he earns there to cover his living expenses.
Aly Sanchez, who worked at Babies ‘R’ Us for more than two years, was “devastated” when she learned she would likely lose her job. “You put so much in one place, as well as you see these corporate people getting these bonuses — as well as here we are actually working as well as trying to make our sales,” said Sanchez, who made $10.85 an hour. “We’re low-income families just trying to work our butt off as well as we’re not getting anything out of in which.”
She started out a completely new job at a hospital in which week, however up until then she was planning to rely on her husband’s salary as well as student loans in which she required to receive within the fall.
as well as Reinhart can be daunted by the prospect of searching for a job after working nearly three decades at Toys ‘R’ Us. She said she never had to write a resume, as well as she’s never used a job search site.
“I catch myself talking to myself saying, ‘Everything can be going to be OK,’” she said through tears. “My husband came home the some other afternoon as well as I was still in my pajamas. He’s never seen me ever like in which. however I just didn’t develop the gumption to get dressed.”
as well as because Toys ‘R’ Us can be such a big company — in which’s the third-largest retailer to ever file for bankruptcy within the US — its employees, like Reinhart as well as Fox, will likely compete with one another for completely new jobs. When job-seeking workers without college degrees flood the low-wage market, in which can drive wages down as well as lead to increased economic inequality, Rosemary Batt, a human resource studies as well as labor professor at Cornell University, told BuzzFeed News.
“Debt can be the lifeblood of private equity, however in which spells death for companies as well as joblessness for workers,” she said.
in which even an iconic store like Toys ‘R’ Us could collapse underscores the challenges of surviving as a private equity–backed company in a rapidly evolving retail industry.
“[Toys ‘R’ Us] was probably not going to be around for many more years, just given the nature of the business in which’s in, as a bricks-as well as-mortar retailer in which sells products in which are easy to buy on Amazon,” Jonathan Cohn, an associate professor at the McCombs School of Business at the University of Texas at Austin, told BuzzFeed News. “All I can say can be the debt through the private equity buyout accelerated its demise.”
within the end, the three private equity firms in which bought Toys ‘R’ Us before its march toward bankruptcy lost much of the $1.3 billion they used to take over the company. however an Axios analysis of Toys ‘R’ Us Securities as well as Exchange Commission filings suggests Bain as well as KKR brought back in fees more than they lost in equity.
“[Toys ‘R’ Us] was probably not going to be around for many more years. … All I can say can be the debt through the private equity buyout accelerated its demise.”
Wall Street may be learning through its mistakes. The leveraged buyout market reduced through $537 billion in 2016 to $495 billion in 2017, according to Pitchbook, a private equity as well as venture capital research firm.
“There’s much more today of a due diligence process before actually creating an acquisition because of what’s going on,” said Efros, whose firm has been hired to evaluate retail deals on behalf of some private equity firms. “Right currently the retail market can be not steady stakes.”
As of currently, private equity firms are largely unregulated. Dodd-Frank required for once in which private equity advisers at larger firms register with the SEC. Private equity managers must also file regular federal exams to ensure they are operating ethically, as well as already several firms have been sanctioned for misleading investors. Sun Capital Partners as well as Cerberus Capital paid $166 million to settle allegations in which they sunk the department store chain Mervyn’s, which went bankrupt in 2008, by selling off valuable real-estate holdings as well as taking large management fees as well as dividends. (After Mervyn’s filed for bankruptcy as well as closed, many of its 18,000 workers did not receive severance, lost vacation pay, as well as had trouble collecting on their 401(k)s.)
While tax reforms passed in December put slight restrictions on how private equity can be able to use leveraged buyouts, Rep. Bill Pascrell, a Democrat through completely new Jersey, told BuzzFeed News in which “by as well as large the practice continues.”
“Sadly, Republicans in Congress have spent most of in which year loosening the guardrails on Wall Street rather than taking on predatory private equity firms like the ones in which put Toys ‘R’ Us out of business,” he said.
As Toys ‘R’ Us settles its debts, its workers are busy closing up stores as well as planning where their next paycheck may come through.
Some workers quickly found work, like Alisha Hudson, who can be three months pregnant. She found a job at Walgreens to support herself as well as her 2-year-old, however her roommate also works for Toys ‘R’ Us as well as can be facing unemployment unless he finds a job by June.
“In our household, in which’s not just one of us losing a job however two people,” said Hudson. “We need all the money we can get.”
Reinhart features a group interview for a job as a supervisor at a Walgreens coming up. in which pays about $5 less than what she made as a supervisor at Toys ‘R’ Us, however she as well as her husband need the health insurance in which offers to cover his diabetes medication.
as well as some former Toys ‘R’ Us employees are currently considering leaving the industry altogether. Behind a row of empty shelves in completely new York City’s Babies ‘R’ Us store two days before in which closed, a former manager at the store, who asked to remain anonymous, told BuzzFeed News in which he plans to enter retail consulting.
“I’m looking at maybe the some other side of the business — the liquidation side as opposed to the retail side,” he said. “If I want to remain in retail, in which’s the right side of the business to be on.” ●
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