Personal Finance

Can Toys R Us Become a U.S. Retailer Again?

Toys R Us' new owners plan to open new stores in the U.S. There's no track record for that type of comeback, but the company might be able to open up holiday pop-up shops or stores within stores. The company does have a strong brand name with adults, but does it have a following of younger customers who would welcome its return?!

A full transcript follows the video.

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This video was recorded on Feb. 12, 2019.

Dylan Lewis: To bring it back around to our conversation about Toys R Us, Dan, how are you feeling about the turnaround? I know most of the focus is going to be in Europe and overseas short term, but ultimately, this brand wants to get back into the United States in a more established retail presence. What do you make of that?

Dan Kline: Dylan, have you ever seen a store go out of business in the United States and then make a big comeback?

Lewis: I have not, Dan. [laughs]

Kline: Have you have you been to Bradley's? Caldor? Circuit City? Any of those made a big comeback?

Lewis: No, unless I'm visiting the retail graveyard, I don't think I've seen any of those recently.

Kline: The reality is, some of those stores -- Circuit City being one of the examples -- had this sort of same "Oh, we're coming back." The only example I could give you of a brand that has come back is that Sharper Image closed all its stores but now exists as a licensing play. I think there's some market for Toys R Us to do holiday pop-ups, to do licensed products, maybe to be a store within a store. On this show, I've talked about how JCPenney added toys to all its stores, but literally all they did was stuff a bunch of toys in their store. There's no rhyme or reason to the selection. Nobody there knows anything about it. If they contracted out to a Toys R Us and said, "Why don't you put a toy store in all of our stores?" If the dying remains of Sears did the same thing, there might be market for this. But I do not believe there is any logic to opening stand-alone Toys R Us stores, unless they're tourist destinations in, like, New York and Las Vegas.

Lewis: Yeah, I actually wonder if the brand is as strong as we might think it is. We're a little bit longer in the tooth than most kids. I wonder if my cousin's kids, who are 8 to 12, even really have a strong association with Toys R Us the way that I did, where I was eagerly waiting for that holiday circular because that was the digest for gifts. I don't think they have that experience.

Kline: No. My son doesn't. Even though we went to Toys R Us a lot, it was just one of the places that sold toys. It was the place that had only toys, so that made it a little bit cooler. I do think there's a concept of a stand-alone toy store that could work, but I'm talking they could launch 20 of them, not another 600 stores. They are much better off partnering, leveraging the brand name, taking advantage of the fact that the older generation knows what Toys R Us is, so it becomes a seal of approval. But the idea that there's going to be a Toys R Us back in every mall, that just seems crazy to me.

Lewis: Yeah, I'm with you on that one, Dan. I think also, when you leave a space and other people are able to swallow up your market share so easily, as we've seen with big box and as we've seen with Amazon , that makes it a lot tougher to reenter, and I worry that they're not going to be able to do that.

Kline: The thing we haven't talked about much is that Amazon, Walmart , and Target can live with very slim margins. When I ran the toy store, we had to make, essentially -- if it cost $10, we had to sell it for $20, it's called keystoning in the retail world. There were some things that were less than that. Lego you weren't allowed to sell at that margin. But in order to cover my overhead, that was basically what you had to do. Target needs to get you into the store so you buy groceries, so you buy a grill, so you buy furniture, whatever else you're buying at Target. They don't care if they only make 8% on toys or 0% sometimes.

Lewis: Yeah, to your point earlier, they want to make it easy for parents to shop if they have kids. If toys are a loss leader, so be it.

Kline: Yeah. That's very hard to compete with. If you and I open up a sandwich shop next to Joe's Free Sandwiches, our sandwiches would have to be pretty damn amazing so we could charge for them. And I'm not sure there's room. Look, I ran a really cool toy store that does really well to this day, but that store had 75 years of history in that location, all sorts of museum-level things drawing people to it, and a very active owner who changed things up and made the merchandise cool. And I'm not sure you can bring that independent vibe to a chain of toy stores. I'm not even sure a chain of toy stores can buy in some of the ways that you have to to make an independent toy store work. So, again, have Barnes & Noble bring Toys R Us in as their toy brand, have JCPenney do it. Put toy stores in Best Buy , that would work. But don't open your own stand-alone stores. It's just a march to another bankruptcy.

Lewis: So we're not buying the retail presence of Toys R Us 2.0. But perhaps in this whole lesson here, there are some good investing takeaways for folks.

Kline: Yeah, absolutely. You should look at retail models that work and require you to go into the store. Five Below , I don't know if they have a website. It doesn't make a lot of sense for them to have one. But let's pretend they do. My experience at Five Below is just, what am I going to see? What am I going to buy? Maybe I went in because I was going to buy candy before the movies, and I see that there's a deal on a few other things I need, so I end up spending $18 instead of $3. That model has proven to work over and over again. You mentioned T.J. Maxx . I mentioned Costco . Those are the sustainable brands, especially the ones that have huge growth potential. Five Below has leverage when it looks for locations. It can go to developers and say, "Hey, I'm a draw. You need tenants. I get a better deal." They're going to be in a very favorable real estate position for quite a while.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. Dylan Lewis owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Five Below and The TJX Companies. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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