Toys “R” Us Doubles Down

by Alexandra Biesada, June 3rd, 2008, 7:00 am

When the nation’s largest big-box specialty toy seller was taken private in 2005 by a buyout group led by real estate firm Vornado Realty Trust, some were quick to predict that its days were numbered. The company had lost its first-place ranking in toys sales in the US to retail-giant Wal-Mart and was bleeding red ink from a series of holiday price wars. Toys “R” Us went on to shutter some 85 toys stores over the next two years. However, while its US toy business fizzled the company’s fast-growing Babies “R” Us chain (launched in 1996) thrived, as did Toys “R” Us retail stores overseas.

Now three years and a new chief executive later, the toy seller is back in expansion mode with a new side-by-side strategy designed to capitalize on the strengths of its growing Babies “R” Us chain. The retailer hopes to boost traffic at its Toys “R” Us stores by situating them next door to its Babies “R” Us locations, which are visited much more frequently by moms shopping for apparel, diapers, formula, and other infant products. The side-by-side stores will have separate entrances, but shoppers can cross from one to the other once inside. Other retailers, including The Gap and Lane Bryant, have experimented with side-by-side stores with mixed results.

The new side-by-side initiative comes on the heels of a nascent turnaround in the company’s business. After five consecutive years of negative same-store-sales comparisons at the company’s US stores, Toys “R” Us posted modest positive gains in fiscal years 2007 and 2008. Indeed, I came away favorably impressed from a visit to a Toys “R” Us store here in Austin last December after pretty much giving up on the chain years before.

Toys “R” Us plans to open 16 of the side-by-side locations this year and begin converting many of its 600-odd toy stores into smaller side-by-side locations. Because the company operates more than twice as many toy stores as baby stores, the tandem strategy will involve a significant increase in its babies business.

It’s an aggressive and potentially risky strategy to take. But given the thrashing Toys “R” Us has taken from seemingly unstoppable Wal-Mart and CEO Jerry Storch’s former employer Target (among others), the company probably has no other choice than to double its bet and go for broke.