Why Target Could Be the Big Winner in Toys This Holiday Season

Geoffrey the Giraffe won't be celebrating the holidays this year. For the first time in more than two generations, Toys R Us won't be part of the annual shopping crush that kicks off after Thanksgiving. The once-beloved toy retailer shut all of its remaining 735 U.S. stores earlier this year, leaving about $7.5 billion in annual sales up for grabs, about 40% of which takes place during the holiday season.

That means retailers are getting set to fight over $3 billion in holiday sales. Not surprisingly, many smell opportunity. In its recent earnings report, Walmart (NYSE: WMT) said that toys would be a focus, adding that it had expanded its assortment by 30% in stores and by 40% online. It also promised that it would have "the best prices on a broader assortment delivered through a seamless shopping experience."

Amazon (NASDAQ: AMZN), meanwhile, is taking the surprising step of mailing a toy catalog for the first time. It recently sent out a holiday gift guide called "A Holiday of Play," another sign that the toy market is increasingly up for grabs.

However, the retailer best positioned to be the biggest beneficiary of the Toys R Us bankruptcy may be Target (NYSE: TGT) -- for a number of reasons. First, the "cheap chic" brand has been increasingly focused on moms. Second, its store footprint is well suited to take market share. Third, it has revamped its delivery capabilities. Fourth, unlike Walmart and Amazon, Target operates only in the U.S., meaning it can fully take advantage of the market share given away by Toys R Us, which held about 14% of the domestic toy market as of 2016.

A remodeled toy department in Target
A remodeled toy department in Target

Image source: Target.

A big push in time for the holidays

Target said earlier in the year that it would sharpen its focus on toys by adding 250,000 square feet of toy-selling space across 500 stores. Additionally, its stores are hosting events where kids can win prizes, interact with characters, and try out new toys. More than 100 remodeled Target stores now have a kid-focused toy department, Target is introducing 2,500 new and exclusive toys, and the company is promising 25,000 hours of in-store events where kids can meet their favorite characters from shows like Paw Patrol.

CEO Brian Cornell has already worked to cultivate the key customer in this area -- moms -- as the baby and kids categories represent two of the company's four signature categories where growth has consistently outperformed. Cornell sees this as an opportunity for the company to distinguish itself from its retail rivals.

With more than 2,000 stores nationwide, including big-box locations in the suburbs and rural areas and smaller locations in cities, Target also has the right mix of stores to help it capture Toys R Us' sales. In fact, 90% of now-defunct Toys R Us locations as well as 96% of former Babies R Us locations are within five miles of a Target, prompting one Credit Suisse analyst to estimate that Target could capture $600 million in additional sales from the bankruptcy.

Target has also put itself in a position to win the holiday season by offering free two-day shipping with no minimum or membership fee, as well as in-store pick-up. It is even offering same-day delivery through Shipt, following its acquisition of the delivery service last year. That should help the retailer chip away at Amazon's traditional shipping advantage through Prime.

Finally, Target should see a bigger boost than Amazon or Walmart, not just because it's entirely in the U.S. market, but also because of the nature of its business. Target's revenue is more seasonally weighted to the holidays than that of Amazon or Walmart. It's not as dependent on groceries as Walmart, and its store base gives it an edge over Amazon in terms of discovery, as many gift-givers prefer to search and compare in stores before deciding on gifts like toys for friends and family.

We should learn more about Target's prospects when the company reports its third-quarter earnings on Tuesday. I expect the retailer to follow in Walmart's footsteps with another round of strong results, giving it momentum heading into the key holiday season.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.