WAYNE, N.J. — Toys R Us’ management has told its employees that it will sell or close all of its U.S. stores, according to a toy industry analyst who spoke to several employees who were on the call Wednesday.
Jim Silver, a toy industry expert, said Toys R Us’ CEO told employees the plan is to liquidate all of its U.S. stores and after that, it could do a deal with its Canadian operation to run some of its U.S. stores.
The company declined to comment.
The chain filed for Chapter 11 bankruptcy protection in the fall, saddled with debt that hurt its attempts to compete.
It pledged then to stay open, but had weak sales during the critical holiday season. In January it announced plans to close about 180 stores.
Sen. Chuck Schumer wants Toys R Us to cash out unused gift cards.
“The music is about to stop for the iconic retailer,” Schumer said in a statement on Wednesday, “and consumers could be left in the lurch.”
Schumer said that once the liquidation is complete, gift cards could be “as worthless and unwanted as a lump of coal in a stocking.”
He also wrote a letter to Maureen Ohlhausen, acting chairwoman of the Federal Trade Commission, asking the FTC to make sure the retailer is doing everything it can to honor the gift cards.
A representative from the senator’s office said Schumer reached out to the FTC after hearing from concerned constituents.
Toys R Us is currently honoring its gift cards. If the company closes all of its stores, it might no longer let customers cash them in.
A company’s customers tend to land “pretty close to the bottom of the totem pole” in bankruptcy cases, said Brian Davidoff, a financial restructuring attorney for Greenberg Glusker.
Judges usually make bankrupt businesses pay their secured creditors such as bank lenders and vendors first. Customers with gift cards are unsecured creditors, Davidoff explained.
If Toys R Us wants to honor gift cards after the bankruptcy filing is complete, it should ask the bankruptcy court to prioritize customers. If that happens, the secured creditors can raise an objection.
It’s up to the bankruptcy court to decide if Toys “R” Us can honor the cards.
If that happens, it’s unlikely that customers would receive a cash redemption, Davidoff said.
“Lenders are going to fiercely resist that,” he said.
Bankrupt retailers eventually might honor a gift card, even if they don’t right away, said FTC spokesman Frank Dorman. But a competitor might be willing to honor a gift card given by a bankrupt company, he noted.
“If you buy a gift card from a company that files for bankruptcy or goes out of business, it may be worth less than you had anticipated,” Dorman said.