Child’s Play: With Toys R Us Gone, Who Wins?

It’s the second week of October and you know what that means — retailers already are making way for holiday wares.

While the creeping forward of Christmas and seasonal merchandise happens every year, the difference this season will be exactly where you buy the toys for all the kiddos on your list.

Who’s stocking Santa’s shelves this year? Not Toys R Us.

Toys R Us, the largest toy retailer in the U.S., shuttered its stores last March. Below, I’ll highlight the investment opportunities that are emerging from the company’s demise.

Toys R Us filed for bankruptcy in September 2017 but had hopes of continuing as a retailer. Despite the harsh image attached to the term bankruptcy, many companies continue operating throughout bankruptcy proceedings and come out of the process thriving.

However, Toys R Us is one of the few retailers to meet its demise via the filing. The loans extended to the company through its bankruptcy filing required it to meet certain Q4 revenue and profit targets. When Toys R Us failed to achieve those goals, a default triggered and demanded the debt repaid. After a short extension to the debt due date, the company decided the most likely path to repayment was the liquidation of its inventory and the closure of its entire store base.

But fear not, you don’t have to settle for coal in your stocking. There are certain stocks in the toy cupboard that can profit.

The Christmas Bonanza

If you’re childless or have children over the age of 8, you probably ventured over the threshold of Toys R Us once a year, most likely in the week before Christmas. According to NPD Group, a retail research firm, the week before Christmas accounts for almost 10% of the entire year’s worth of sales for the toy industry.

There’s a whole lot of money at stake here. Industry figures estimate that Toys R Us sold $1.4 billion worth of merchandise last year just in December. Retailers are scurrying to set themselves up with fully stocked toy shelves for the holiday season.

Some chains, like Walmart (NYSE: WMT) and Target (NYSE: TGT), already house a sizeable toy selection. But with the most prominent player off the block this year, both are expanding the variety and the depth of toy choices.

Target has already seen a bump in its toy sales even before the holiday shopping season, thanks to the proximity of many of its stores to shuttered Toys R Us doors. The retailer hopes to hit a bull’s eye by adding 500 square feet of toy space during November and December, borrowing space from its book and DVD sections.

BJ’s Wholesale Club (NYSE: BJ) noted it would have twice as many toys for sale on its website and that its in-store toy selection will rise by as much as 20%. The company is also offering members free shipping on certain toy purchases greater than $50.

Toy selection at Walmart stores will increase by 30% and online by 40%. Not to be outdone, the perennial online favorite Amazon (NSDQ: AMZN) is reportedly working on a Toys R Us lookalike toy catalog that will be mailed to Prime members and distributed at Whole Foods stores.

And while most consumers are accustomed to running across toy trucks and dolls in the grocery store in December, stores like Party City (NSDQ: PRTY), Kohl’s (NYSE: KSS) and Five Below (NSDQ: FIVE) are also joining the toy bandwagon.

This might sound like nirvana to Hasbro (NSDQ: HAS) and Mattel (NSDQ: MAT), both of which once counted Toys R Us as one of their largest accounts, but there’s a caveat for them. Seasonal customers doesn’t have the space to stock an excess of toys all year round and they’re prone to inflicting severe markdowns on toys that don’t sell quickly.

At my Profit Catalyst Alert service, I hold two stocks in my portfolio that I think will benefit from the trends that I just described. One of them already is handily beating the market. My list of trades to capitalize on this industry shift is increasing. I expect these plays to leave a pile of profits under the holiday trees of investors who act now. Click here for the details.


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