Category killers don't usually exit gracefully from the markets they establish. By revolutionizing the toy industry and driving every mom-and-pop store off the face of the earth, Toys "R" Us (NYSE:TOY) established a brand name that was hard to match in the specialty retailing segment. Geoffrey the giraffe was almost as recognizable a corporate image as Ronald McDonald of McDonald's (NYSE:MCD), and shopping at the retailer's store was a fun experience for the whole family.
The Fool's Alyce Lomax gave her take a few weeks ago on the possibility of Toys "R" Us slinking out of the domestic toy business and focusing on its flourishing baby business. With the toy industry experiencing a great upheaval as of late with the departure of FAO Schwarz and KB Toys, as well as Amazon (NASDAQ:AMZN) running away from an online venture with Toys "R" Us, we might have seen the last of the great toy retailers. Retailers such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST) have rewritten the successful toy formula by using critical mass to purchase and sell toys at attractive price points.
To be honest, I haven't been inside a Toys "R" Us store in a few years. Looking at the company's second-quarter earnings release, I'm not the only consumer shopping elsewhere. Sales at domestic stores, which make up about 52% of the company's total revenue, dropped 7%, year to year. The bright spots were Toys "R" Us International and Babies "R" Us, which grew sales 9.3% and 5.8%, respectively, and made up 23% and 22% of net revenues. With more than half of the company's sales still coming from Toys "R" Us, there is still much work to do to shift the focus from toys to babies.
While the company has begun plans to scale back and potentially sell off its global toy business and spin off Babies "R" Us into a separate company, investors should begin formulating an answer to the question: Is Toys "R" Us positioning itself to be another Kmart (NASDAQ:KMRT)? (Fool Seth Jayson discussed this possibility relative to supermarket chain Winn-Dixie (NYSE:WIN) last week.)
The last time I walked into a Kmart, tumbleweeds rolled past me as I entered the store. Yet Kmart's shares have jumped more than 200% this year on its valuable real estate investments (not retail strength). Toys "R" Us also has extensive real estate properties that could fetch tremendous interest if up for sale. I never thought I would ask this, but could Toys "R" Us be the next Kmart?
Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.
