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Toys R Us Teetering on the Brink of Collapse, UK Retail Sector Crisis Perfect Storm

Companies / Retail Sector Dec 19, 2017 - 05:55 PM GMT

By: Nadeem_Walayat

Companies

The British arm of Toys R Us has been teetering on the brink of collapse for several months now following it's american parent company filing for bankruptcy protection in September 2017 that triggered a downsizing programme through rapid store closures that are likely to see at least 200 of it's 866 US stores close in an attempt at reducing its $5 billion debt mountain which dates back to its leveraged buy out of 2005 that costs Toys R Us $400 billion a year in interest payments.

So it should not come as that much of a surprise that the British arm of Toys R Us with its 106 stores could now be heading for at least a similar fate if not a 'Woolworth's' moment, that could unfold rapidly, all within a matter of days that could see the retailer plunged into administration with the potential loss of 3200 jobs. The triggering factor for which is a £30 million black hole in its employees pension fund that the Government Pension Protection Fund is demanding a near immediate payment of £9 million into to cover 3 years worth of past pension contributions, against which the distressed retailer is offering just £1.6 million and thus the current crisis.


The key point is that the PPF would be forced to step in if the retailer went bust and the calculation being made is that if Toys R Us lingers on for another year before going bust then by that time the pension black hole could be twice the current estimated size.

However Toys R Us is just the tip of the retailer sector crisis that I have repeatedly been warning of ALL YEAR as I expected Britain's retail sector to face a perfect storm, perhaps several 'Woolworth's' moments that could see at least 1 major retailer go bust, and my warnings were not just focused on the the smaller players such as Toys R Us but right from the top, Britain's largest retailer TESCO downwards, most of which have increasingly been suffering all year.

Fundamentally, it is the same old story of giant bricks and mortars retailers being killed off by the internet, by the likes of Amazon and a myriad of other online only retailers that have sprung up over the past decade or so. Against which the bricks and mortar retailers just cannot compete in terms of price given their vastly differing overheads. And the basic flaw in Toys R Us is that the stores were JUST TOO BIG! Which is why they are suffering whilst smaller store retailers such as The Entertainer toy ship chain that continues to do well, for now at least.

And where for this years perfect storm we also had the persisting dynamics of soaring inflation as a consequence of the BrExit sterling plunge, which in the latest data remains stubbornly above 3% CPI. Therefore generating year long upwards pressure on shop prices as suppliers restocked at much worse exchange rates that already depressed retailers such as the big supermarkets had delayed fully implementing.

05 Mar 2017 - Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017

In June 2016 the people of Britain voted against the interests of the establishment political elite that have played pass the parcel amongst themselves at each general election for at least the past 40 years, who in treaty after treaty have been systematically selling the sovereignty of the British people to the emerging european union superstate primarily for personal gain.

Whilst the formal process for Britain leaving the European Union remains pending triggering of Article 50, which should occur by the end of this month. However, despite little so far having changed on the ground in Britain's relationship with the EU, there was one significant immediate reaction to the Brexit vote which was sterling's sharp 20% drop and which currently stands about 18% below its pre-brexit trading level

Retail Sector Impact

Therefore the retail sector is facing a perfect storm of rising prices, falling consumer disposable earnings and haemorrhaging customers to the discounters. All of which will culminate in increasing pressure on profit margins and balance sheets. Whilst it is still too early to imagine another woolworth's moment, i.e. a retail giant going bust, nevertheless there will be an impact which will at the very least translate into more job losses and probably the mothballing of many unprofitable stores, the closure of huge super markets, something that is unthinkable to most will likely become a reality so as to bolster profit margins by cutting costs by closing super markets that are no longer able to operate at a profit.

And then the retail sector had to contend with STAGFLATION, one of wage growth of just 1.8% persistently lagging behind the so official inflation rate of CPI 3.1% acting to squeeze the purchasing power of worker earnings. However in reality actual inflation is far higher with RPI at 4% and real demand adjusted inflation at 5.1% implying that the UK economy has been in deep stagflation for the whole of this year, one of the real terms erosion of the purchasing power of earnings, i.e. falling demand which increases the risks of a recession as the economy enters a depressed stagnant state where workers are not able to maintain consumption of goods and services resulting in economic depression with inflation i.e. stagflation.

In additional to my many articles, my following videos further illustrate the unfolding retail sector crisis of 2017 that I warned threatened to claim at least 1 major retailer in a 'woothworths' moment.

Global Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017

Tesco Crisis - Stock Price 60% Collapse, Next WoolWorth's?

Whilst my most recent video in the retail sector crisis series took a look at the prospects for Britain's third largest retailer, Asda.

Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017

In terms of shoppers, well if Toys R Us does go bust then one can expect deep discounts in individual store closing down sales as and when they are announced, in fact there ARE going to be closing down sales no matter what happens in respect of the pension fund, it's just a question of how quickly and how many stores, i.e. at least 1/3rd of Toys R Us stores were likely to close anyway! Though shoppers should remember to act fast on store closure announcements as most of the stock will go fast.

Whilst retail investors have had a lucky escape because Toys R Us has toyed with an IPO several times over the past few years, with 2017 having been seen as the year to float that may still materialise in some form, perhaps an asia only stores float without the debt burden could convince institutional investors to play.

The bottom line is that Toys R Us is just the tip of the ice-berg of what I expect to follow during early 2018, as the failure of retailers to perform during November and December 2017 will put many into severe distress during January and February 2018 as the retail sector crisis continues to unfold.

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2017 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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