Macy's is projecting that its Toys R Us in-store shops will eventually be a bonanza, generating $1 billion in annual sales for the department store chain.
New York-based Macy's — owner of its namesake stores as well as Bloomingdale's and Bluemercury — offered the outlook when it reported its fiscal second-quarter earnings on Tuesday.
By Oct. 15, all of the retailer's roughly 500 Macy's stores are slated to have Toys R Us shops, which range in size from 1,000 to 10,000 square feet, “just in time for the holiday and gifting season,” Macy's CEO Jeff Gennette told Wall Street analysts. A life-size Geoffrey the Giraffe, the Toys R Us mascot, will be on display at the in-store shops to provide a photo opportunity for parents and kids.
Macy's, Menominee Falls, Wisconsin-based Kohl's and Minneapolis-based Target are among the retailers that have forged high-profile partnerships for other companies to open boutiques within their stores. Last week, Kohl's announced it would launch Sephora beauty sites within its entire physical footprint, more than 1,100 stores, which is 300 more locations than it originally planned. And Target is continuing to roll out Ulta Beauty in-store shops in parts of its store fleet.
The in-store shops are meant to help drive foot traffic and draw new customers to places such as Macy's and Kohl's. They also allow companies like Toys R Us — the retailer that liquidated in 2018 but is trying to mount a comeback with new owners — to establish or expand their brick-and-mortar presence without the expense of opening stand-alone stores.
Macy's initially wasn't looking to have Toys R Us boutiques within its entire chain, just at 400 stores. But in July it announced it would expand the partnership and open them up at all its full-line Macy’s stores as well as its handful of small-format Market by Macy’s locations. The rollout is slated to be completed by the middle of next month, and Macy's expects to be able to tap into the toy sales market.
Chance To Grab Market Share
Similarly, last week Kohl's officials projected that Sephora at Kohl’s will reach $2 billion in annual sales by 2025.
U.S. toy sales were roughly $38.2 billion last year, a 14.2% increase over 2020, according to NPD Group data cited by the Toy Association.
Both Macy's and Kohl's also reported a halo effect from their respective Toys R Us and Sephora shops. Customers buying items in the in-store shops are also picking up merchandise in other departments. In the case of Macy's, it has seen a lift in sales of children's apparel, and it reported that 87% of Toys R Us customers "cross-shopped" categories at its stores.
“We’re encouraged by the customer response in the current [Toys R Us] store locations," Gennette said. "And we’re seeing an improved sales trend in our kids’ business, which typically sits next to Toys R Us store-within-stores.”
Like a number of its fellow retailers, who also cited high inflation and other macro economic factors, Macy's lowered its guidance for the full year. In the second quarter revenue declined, to $5.6 billion from $5.65 billion. The company's various chains overall saw comparable sales slip down 1.5%.
“During the quarter, Macy’s-brand customers across all income tiers slowed and shifted their spend," Gennette said. "Persistently high inflation drove higher prices in food and fuel, and in turn led to higher interest rates and a softening market. As a result, overall consumer discretionary spending and sentiment weakened compared to the prior year.”
Rejiggering Brick-and-Mortar
"To be fair to Macy’s, it is not so much the complete lack of a strategy that concerns us because the company does have a string of things it is trying and testing," Saunders said. "These include the continued opening of smaller-format stores, the integration of Toys R Us into a number of existing shops, and the continued development of own-label products. The issue is that these things are executed very poorly and while Macy’s talks them up as grand gestures that will transform the business, the reality on the ground is extremely lackluster and insufficient to make a major difference. This has been a long-term issue at Macy’s, with ventures ... being heralded and then left to fester and rot until they fade into obscurity."
Macy's has been reshaping its real estate footprint, by opening off-mall, small-format stores. Its goal this year is to debut five to six off-mall locations, a mix of Market by Macy’s, free-standing Macy's Backstage, Bloomie’s and Bloomingdale’s the Outlet.
With those stores, Macy's has seen a chance to increase its market share by: opening in areas where the company already has a store but sees an opportunity to gain more foot traffic and a new customer base within the market; putting them in replacement locations for markets where the closing of an underperforming big-box location would result in a market exit; and adding them to new markets where the company hasn’t had a store presence before.