Toys R Us prepares plan to liquidate its business

Toys R Us, the iconic U.S. retailer, is in the process of drafting the court motion for its liquidation plan, a source familiar with the situation told CNBC on Tuesday.

The retailer could file as soon as the end of Wednesday, making the motion official. It will then begin to wind down the storied toy retailer, after more than half a century in business.

A liquidation will most likely result in the closing of all of Toys R Us’ 800 stores in the U.S.

It will be a blow to the toy industry, which has relied on it for supplying row after row of toys and premium pricing. Toys R Us accounted for 15 to 20 percent of U.S. toy sales last year, according to Jefferies analyst Stephanie Wissink.

'Store Closing' sign is posted in a Toys R Us store.

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‘Store Closing’ sign is posted in a Toys R Us store.

Without Toys R Us to sell its products, toymakers need to rely on Amazon and compete for the limited shelf space in big-box stores. As such, Wissink estimates as much as 15 percent of all Toys R Us’ toys sales could be lost for good.

Shares of toymaker Mattel have dropped 8 percent since CNBC reported the retailer was weighing a bankruptcy filing in September, while rival Hasbro‘s stock has shed about 4.6 percent.

Toys R Us entered bankruptcy in September with $4.9 billion in debt, a vestige from its $6.6 billion acquisition by Kohlberg Kravis Roberts, Bain Capital Partners and real estate investment trust Vornado Realty Trust in 2005.

Toys R Us had sold to those financial buyers amid pressure as WalmartTarget and others undercut its prices. The debt from that buyout, though, only added to its challenges. Retail soon dramatically changed, led by the rapid rise of Amazon, and Toys R Us found itself hamstrung by payments, unable to make the investments it needed to in order to keep up.

It had hoped under bankruptcy protection to finally make the changes it needed to compete — like a stronger internet business and more experiential stores — but, ultimately, it was too late. The crucial holiday season was dismal for the retailer, and it missed on all its financial estimates.

In the weeks that followed the holidays, pressure continued to mount. Its low cash balance left it at risk of breaching the terms of its bankruptcy loan, sources previously told CNBC. Another subset of of its lenders, meantime, have been pushing hard for liquidation, sources told CNBC.

Last week, it became increasingly clear that liquidation would be the most likely route. Still, as recently as last week, it was placing orders from its vendors and telling employees it was business as usual, sources said.

This week, though, Toy R Us missed a payment to some of its vendors, and was not responsive to calls, sources told CNBC. Bloomberg first reported the missed payment.

The people requested anonymity because the information is confidential. Toys R Us declined to comment.

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