What happens when you spend most of your
life doing a job only to see it disappear? “I’m from the generation from where hard work should pay off and I said that was
the least that they owed us because they were all still making money.” What happens when
one of your town’s largest financial contributors leaves? This is the story of
how one company’s failure impacted people, places, and a nation. When Toys “R” Us said it was closing all its U.S. stores, it didn’t just mean the end of an iconic
brand, it was also the end of thousands of jobs and millions in tax revenue. The
losers in this case, of course in the first instance, are the workers. They’ve
lost their jobs and they’re being denied severance. Hey fam. I’m Imaeyen and this
Sunday we’re telling you how one retail giant collapsed and why we might be
seeing a lot more stores following in its footsteps. Spoiler alert. It’s not
just Amazon’s fault. Wall Street’s involved too. So yeah, it’s kind of funny that uh, that’s how much help I needed. (Laughs) That’s how bad it was. That’s the finished product so I’m proud of that one. This is the first time Ann-Marie Reinhart has ever had to do a resume. When she began working at Toys “R” Us 29 years ago, she didn’t need one. When I first sat down to do the resume I was like, “Alright, you know I’ve done this. and I was just jotting those one or two words down. I had someone look at it from the Department of Labor, she went, “Ooooh”, it was not so good.” (giggles) Reinhart spent the first 25 years of her
time at Toys “R” Us in New York, before she moved to North Carolina. She thought
she’d retire from Toys “R” Us. She thought that even as she saw signs
of its financial difficulties and its restructuring. She thought that even
after the company tried to reassure employees. “I don’t want to get too
emotional because when I really start talking about it… I guess… Can you give me napkins? I feel it
coming on. In September they had filed for Chapter 11. Obviously, you know, that
was a red flag for all of us. Then Dave Brandon sent a letter to everyone in the
country stating, you know, nobody to be alarmed, everything’s gonna be fine.
We’re just restructuring this loan.” Everything would not be fine for
Toys “R” Us. Reinhardt is one of 33,000 employees who lost a job when Toys “R” Us went bankrupt. Her store in Durham shut down in the first wave of closures in
February. The last doors closed shop at the end of June. “I’m starting to get
scared. I’m not gonna lie. I’m starting to get scared because I’ve been looking for
a job and unemployment runs out in about four weeks.” The store’s road from
profitability to bankruptcy is the tale of what can happen when Wall Street
steps in to try and turn a company around. Economist Eileen Applebaum says
when private equity buys retailers like Toys “R” Us, often the investors win while
the company and its employees suffer. “When private equity owns the company and
sells off the real estate, the company does not get the money. The money goes
directly to the private equity firm and its investors. There’s nothing in it for
them. For the, for the retail company and this makes no sense from the perspective
of having a strong business. It only makes sense from the point of view of
the private equity firms.” See even if a company like Toys “R” Us goes bankrupt, the private equity firms still make money through things like charging millions
in fees to the retailer, or selling off all the company’s real estate. Toys “R” Us
was actually turning a profit when it filed for bankruptcy. How profitable was
it? It was responsible for one out of every five toys sold in the U.S. in 2017.
But the retailer was saddled with millions of dollars in debt thanks to
the private equity firms that bought it — too much debt for its profits to make a
difference. “The interest expenses alone were four hundred million dollars a year.
So, if you’re paying a four hundred million dollars a year in just interest
expenses, not to mention that you’re also paying rent, not to mention that you’re
also paying these advisory fees, there’s not a whole lot left to invest in the company.” Private equity firms found Toys “R” Us enticing in 2005,
even though competitors like Wal-Mart were already putting the squeeze on the
company. That’s when Bain Capital, KKR & Company, and Vernado Realty Trust bought the toy retailer. What often happens with private equity is that they say their
goals are to invest money, cut costs, and improve efficiency, and all while trying
to maximize profits. Private equity makes its money if it boosts the company’s
perceived value and then sells it. And the majority of the dollars and cents
they’re using in this game aren’t even their own. The companies who are owned by
private equity firms are at risk of bankruptcy if they can’t pay off their
debt. “The private equity firm puts in a little bit of money to that fund, very
little. And the pension funds and other investors put up the rest.
So they’re basically playing with other people’s money. The private equity firm
puts in one or two dollars for every hundred that the investors put in. So the
private equity firms have very little skin in the game, very little that they
can lose.” Companies like Bain Capital helped save stores like Burlington Coat
Factory, Dollar General, and Restoration Hardware. And they’ve made plenty of
money in the process. But for every Burlington, there’s a Sports Authority, a
Gymboree, a Payless, and a Toys “R” Us. “Yeah, they took the letters off the building. Oh my goodness. Wow.” Those are just a few of the
retailers that went bankrupt in 2016 and 2017. PE-owned businesses are accounting
for an increasing share of Chapter 11 bankruptcies. Part of why we’re
seeing these companies go bust right now is because of over investment in
property during the mid-2000s. Large big-box stores kept going up, as did
property values. Many considered purchasing big-box retail space as savvy
investment at the time. The bet didn’t pay off, and the effect of the so-called
retail apocalypse has been widespread. Overall retail employment has been
falling. You’ve probably seen your local mall with a few empty storefronts.
Department stores like Macy’s and JC Penney shed nearly a hundred thousand
jobs between October 2016 and April 2017. That’s more than the total number of
coal miners or steel workers we so often hear President Trump talk about. The
retail problem is impacting every region. The nation’s richest cities are also
seeing retail struggle. New York City had three years of falling employment at
clothing stores as of 2017. A streak like that hasn’t happened since the early
1990s. When stores disappear, jobs vanish, and so does the money those companies
contribute to local economies. “People came to downtown in a small town because
they were going to go shopping for toys and while they were there they visited
the other stores as well. And the same thing is true of malls. These malls and
main streets are losing a major anchor store. So communities suffer. Lenders
suffer. Vendors suffer, and worst of all the employees suffer.” Now, some of those
laid off retail workers, like Reinhart, are fighting just to get severance. “Now,
is the end of February, the end of March, we’re about halfway through our
liquidation, still not no word on what the severance package was. And that’s
when we found out that we were not getting any severance. And we found out, via a phone call.” “This is a company that traditionally paid severance all the way up to 2016. The year before the bankruptcy, they were still paying
severance when they laid off workers and now they’ve refused to do that.”
Toys “R” Us is headquartered in Wayne, New Jersey. It paid more than $2.7 million to the town on its property in taxes last year. The former toy giant is
Wayne’s third largest taxpayer, according to Moody’s. Wayne is now out exactly 1,159
jobs, which is the equivalent to 2 percent of its population and millions
in taxes to fund town services. When Toys “R” Us leaves, the lot it sits on
will decrease in value if it’s vacant for too long. That’s true of all 740 Toys “R” Us stores that’s shut down in the U.S. Right now the future of all those
vacated properties is as unclear as Reinhart’s employment prospects. We don’t
know what will happen. The one thing that is certain is that Reinhart is done
looking for retail work. “I’m definitely not looking to go back into retail. It
did leave a little bit of a bad taste in my mouth. I never ever dreamed at my age,
that I would be out there needing, and looking for a job. So that part gets a
little emotional.” Hey fam, thanks for watching. Don’t forget to like, share, and subscribe. This is the first of two stories we’re doing on bankruptcy. Come back next weekend to see the other one, and we’ll see you next Sunday!