Mastermind Toys gets order for creditor protection, wants to close some stores

Mastermind Toys says it has obtained an initial order for creditor protection from the Ontario Superior Court of Justice as it faces financial challenges and a slowing economy.

The Toronto-based specialty toy and children’s book retailer characterized the decision to file for the protection as “difficult but necessary” and said the move was the product of increasing competition, disruptions from the COVID-19 pandemic and, more recently, a deteriorating macroeconomic environment.

“Despite implementing a series of operational improvements and cost reductions, and undertaking an extensive strategic review and conducting a robust sale process, the challenges facing the company’s business have become too significant to overcome,” Mastermind said in a news release.

The company declined an interview with CBC News, saying that it was prioritizing communication to its employees and other stakeholders on Friday.

News of the company’s creditor protection filing came on Black Friday, a sales period that is typically a boon for retailers, especially those selling toys, which people often purchase in advance of the holiday season.

Creditor protection allows companies facing financial difficulties to restructure their operations in hopes of helping the business overcome its challenges and rebound.

As part of its creditor protection proceedings, Mastermind said all 66 of its stores across Canada will remain open for business, and all ongoing sales and holiday promotions, including its Black Friday sale, will continue.

However, it will immediately liquidate and close some “underperforming” stores while exploring alternatives for the business with an unnamed buyer, who has been in “accelerated negotiations” to buy the company, management consulting firm Alvarez & Marsal Canada Inc. said in court filings made on behalf of Mastermind.

“If a transaction with such purchaser materializes, it is the Mastermind Entities’ intention to conduct a holiday sale for continuing stores in the normal course,” court documents say.

“If the proposed transaction is not finalized imminently, the Mastermind Entities will have no choice but to commence a full liquidation of all 66 of their retail locations.”

Specialty retailers feeling the pressure: analyst

“I’m surprised because they have some really good quality stuff in there,” said Sophia Espinoza, a Toronto shopper who was exiting a Mastermind store in Toronto’s Summerhill neighbourhood on Friday.

“I’ve bought the odd item once in a while but not [on] a frequent basis, such as other stores like Toys ‘R’ Us or Indigo,” she said, adding that should the store close, it would leave her with one less option for Christmas shopping.

Mastermind’s circumstances are “indicative, really, of the pressure that many, many retailers are finding right now,” said Doug Stephens, the founder of consulting firm Retail Profit.

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Stephens added that a few patterns in the retail sector are impacting companies like Mastermind, including the decline of specialty retail: “We live in a world where just about everything is available just about everywhere.”

Another is the pressure that online marketplaces like Amazon have put on traditional brick-and-mortar retailers.

These factors, combined with a changing consumer market — with children increasingly turning to online or digital games instead of analog toys — put Mastermind in a tough spot, Stephens explained.

Company has been trying to sell since April

Mastermind began trying to sell the business in April, after experiencing material net losses and financial strain.

A bidder was found but the deal was subject to “a lengthy review process with the Competition Bureau, which involved both Mastermind LP and the proposed purchaser responding to extensive information requests and making numerous submissions,” court documents say.

A Black Friday promotional sign is shown at a Mastermind toy store in Toronto’s Summerhill neighbourhood on Friday. (Tess Ha/CBC)

Because of the “material cost and length of time that would have been required to respond” while the company faced “challenging circumstances” and the upcoming holiday season, it filed for creditor protection instead.

It plans to seek further authorization from the Ontario Superior Court of Justice to close an unspecified number of stores during the proceedings under the Companies’ Creditors Arrangement Act. It also expects to seek additional relief at a court hearing next Thursday.

Mastermind owes $22.2 million to merchandise vendors and $2.6 billion to logistics and other vendors. It also has about $5.6 million in outstanding gift card liabilities.

These amounts are owed to unsecured creditors, who typically have no collateral and are thus often unlikely to recoup outstanding amounts.

Its secured creditors include Canadian Imperial Bank of Commerce, which is owed $25.7 million.

The debts come as Mastermind said its same stores sales have declined materially, trending about 22 per cent below prior year results.

Mastermind’s history dates back to 1984, when brothers Andy and Jon Levy opened an educational software store in Toronto. Its popularity convinced the brothers to turn the store into a chain and to broaden its merchandise assortment.

By the 2000s, they had rebranded the company to focus on educational toys rather than software and renamed the chain Mastermind Toys.

The company also has an e-commerce platform, which it said accounts for about 10 per cent of sales, and employs roughly 800 workers.

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