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Toys 'R' Us Closing Stores Would Open Doors for Rivals

It's not like people are going to stop buying toys.
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Toys "R" Us Inc. may soon cull some of the less-treasured items in its corporate toy box.

Bloomberg News reported on Monday that the chain is considering closing 100 to 200 locations as it grapples with disappointing holiday-season sales. No one should find such a move terribly surprising; Toys "R" Us filed for bankruptcy in September, and it is pretty typical for retailers to consider trimming their store portfolio in that situation.

But even if Toys "R" Us weren't in tough financial shape, re-evaluating its store count would be the right thing to do. At the end of its most recent fiscal year, the company had 879 stores in the U.S., including its Babies "R" Us brand and other retailing formats.

So Many Stores

Toys "R" Us has a large store count for the digital era

Source: Company filings

Side-by-side is a location with 20,000-40,000 square feet of traditional toys and 10,000 to 30,000 square feet of baby products.

But back in 1994 -- the year Amazon.com Inc. debuted and lit the online shopping fuse -- Toys "R" Us had 822 domestic stores. That means its store portfolio today is bigger than in the pre-online shopping days, even as a major share of toy spending has migrated to digital channels. 

Digital Revolution

In categories such as toys and apparel, a major share of spending now happens via e-commerce

Source: Internet Retailer, company reports, Keybanc Capital Markets estimates

Against that backdrop, it is prudent for the company to consider closures, even if it causes short-term pain. 

The ripple effects could be far-reaching. The likes of Hasbro Inc. and Mattel Inc. have already said they've suffered sales disruption from the Toys "R" Us bankruptcy. In fact, Mattel blamed it for about half of its revenue decline in the latest quarter.

It certainly would be a hurdle for these brands to lose so many outlets for their wares. But I think it would be a surmountable challenge. The trouble at Toys "R" Us doesn't reflect flagging demand for toys. Toys "R" Us is flailing because it was saddled with an unsustainable debt load and because Amazon and other players are eating into its sales. If Hasbro, Mattel and others can work well with other retailing partners, then there's plenty of shopper appetite for their brands. 

Also, if I were in the toy division at Amazon, Target Corp., or Wal-Mart Stores Inc., I'd be hustling to figure out ways to scoop up the sales that might once have gone to closing Toys "R" Us stores.  The toy business is becoming increasingly competitive, with retailers such as J.C. Penney Co. Inc. adding toy areas to their stores to offset the weakness seen in apparel sales. There's reason to believe that if stores close, many of those dollars will not just migrate to the Toys "R" Us store a little farther away:

Up For Grabs

When asked what they do when a store they visit frequently closes, the largest share of shoppers said in a survey they switch to a competitor

Source: AlixPartners

Toys "R" Us closing a big share of stores could be the kind of turning point that sorts this retailing category into winners and losers. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Sarah Halzack in Washington at shalzack@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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