It is almost certain that Toys 'R' Us Australia will collapse after its US parent called in liquidators. While this puts 2,700 Australian jobs at risk, other retailer chains owned by Wesfarmers Ltd (ASX: WES) and Woolworths Group Ltd (ASX: WOW) could share in a $1 billion sales windfall.
Toys 'R' Us will close all 885 stores in the US and the 45 local stores are more than likely to shutter unless it finds a new owner as it depends on the backing of its US parent to keep its head above water given that is has net liabilities of around $6 million.
Experts think Wesfarmers' Kmart and Target stores, as well as Woolworths' Big W department stores will be among the key beneficiaries of Toys 'R' Us Australia's collapse, according to the Australian Financial Review.
Following this logic, one would think embattled Myer Holdings Ltd (ASX: MYR) could also benefit from the removal of a key rival.
Toys 'R' Us Australia may have been losing market share but it still generates nearly $300 million in sales – a considerable share of the $1 billion Australian toy market!
This could not come at a better time for Woolworths as its Big W chain has been a big drag on its earnings. Sales at Big W had fallen 5.8% in FY17 to $3.6 billion and management will be keen to pick up a big slice of Toys 'R' Us Australia sales.
Target is also in similar trouble with Wesfarmers struggling to turnaround the business with the department store reporting a $506 million drop in FY17 revenue to $2.95 billion.
But I doubt that Wesfarmers and Woolworths will enjoy much relief even if they manage to capture a large slice of the Toys 'R' Us pie because of the online threat.
The key problem behind the Toys 'R' Us demise is their product mix. They sell toys that are widely available at a cheaper price from online retailers. This same issue is one of the reasons why Target and Big W are under pressure in the first place.
The closure of Toys 'R' Us may actually be a bigger benefit to our cyber retailers like Kogan.com Ltd (ASX: KGN) as the online seller also sells toys as part of its expanding repertoire.
Retail is a tough space and the only brick-and-mortar retailers that I would own are those that can hold their own against online rivals. This generally means focus on specialty stores and avoid general retailers.
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