Not Just A Toy Story: Market Winners And Losers From The Toys ‘R’ Us Liquidation

Toys ‘R’ Us’s days as a toy retailer appear to be numbered after the company filed plans for liquidation of its more than 700 domestic stores and over 200 of its Babies ‘R’ Us stores. Investors are now questioning what impact the closures will have in the overall retail sector considering Toys ‘R’ Us’s realized $12 billion in total revenue in fiscal 2016, $7 billion of which was in the U.S.

The Analysts

KeyBanc Capital Markets’ team of analysts, led by Brett Andress, Edward Yruma, Brad Thomas, Jason Gere, Monika Garg, and Evan Wingren discussed in a note the winners and losers across the entire retail space.

Leisure Segment

• The timing of Toys ‘R’ Us’s store closures in early spring should give the leisure channel sufficient time to “recover somewhat” ahead of the holiday period.
• A portion of Toys ‘R’ Us sales will likely be “lost forever” but larger manufacturers will be better positioned to navigate over the longer-term.
• The impact to Mattel, Inc. (NASDAQ: MAT) could be more negative than its peers given its fiscal 2018 focus on top-line stabilization and its “more fragile” balance sheet.

Softline and E-Commerce

• Walmart Inc (NYSE: WMT) should capture 200 to 300 basis points of Toys ‘R’ Us market share, or $1.1 billion in sales.
• Amazon.com, Inc. (NASDAQ: AMZN) should capture at least 200 basis points of the market share, or $870 million in sales.
• Walmart and Amazon could capture between the two of them 40 to 50 percent of Babies ‘R’ Us sales.

Hardlines

• Bed Bath & Beyond Inc. (NASDAQ: BBBY) will likely be the “most direct beneficiary” in the hardline space as 10 percent of total sales are baby products.
• Ollie’s Bargain Outlet Holdings Inc (NASDAQ: OLLI) could benefit as well as toys account for 5 percent of sales.
• Five Below Inc (NASDAQ: FIVE) is seen as a potential “substitute” for Toys ‘R’ Us in some cases.

Household Products

• Incremental risks to Newell Brands Inc (NYSE: NWL) is “marginal” as its sales to Toys ‘R’ Us is at most 2 percent of total sales and full-year EPS contribution is less than 10 cents.

Vertical Software

• Elevated bankruptcy risk remains and investors should hold a cautious stance in Manhattan Associates, Inc. (NASDAQ: MANH), SPS Commerce, Inc. (NASDAQ: SPSC), and ChannelAdvisor Corp (NYSE: ECOM).

Media And Internet

• The media and internet space will likely see a “limited impact.”
• Toys ‘R’ Us is a “very small channel” for video game publishers and retail store closures in general is a “positive” as it forces consumers to shift towards higher margin digital sales.

Related Links:

Analyst Sees Buy Opportunity In Hasbro As ‘Black Panther’ Success Should Help Offset Toys ‘R’ Us Decline

Analyst: Toys R Us Closures Could Be Positive Catalyst For Bed Bath & Beyond

Image credit: Terence Ong (Own work), via Wikimedia Commons