Toy retail giant Toys “R” Us has recently tapped a law firm to explore options for a company-wide restructuring.

Neil Saunders, managing director of GlobalData Retail, said while the decision of Toys “R” Us to appoint restructuring advisors is not necessarily a sign that bankruptcy is imminent, it is an indication that the company is in a very uncomfortable financial position.

“For a robust retailer, debt payments can be challenging,” Saunders said. “For a retailer struggling to generate sales growth while, at the same time, trying to invest to remain relevant – it can be the difference between success and failure.”

Saunders said in their view, Toys R Us is facing a pincer movement.

“Firstly, it suffers competition from online and physical generalists who happily discount toys to drive customer traffic and sales for stores and websites,” Saunders said. “Toys “R” Us has little choice but to price match on some items but has no other categories with which it can balance out eroded margins. Where it fails to price match, it loses sales.”

Secondly, he said, Toys “R” Us has lost out in the digital space. Although recent digital investments have been made, the website and general e-commerce proposition are still below par.

“By our calculations, Toys “R” Us continues to lose online market share in toys.”

According to Saunders, in addition to these two challenges, Toys “R” Us has large, expensive stores.

“These are increasingly unsuited to what consumers want and expect, and they are steadily becoming less productive and efficient,” he said.

“Against this backdrop, Toys R Us has to contend with the debt it accumulated as part of the leveraged buyout. In our view, this is an example of private equity damaging retailers by not running them as commercial trading entities but as ATMs.”

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