Last August, Macy's (M -3.09%) announced a broad partnership with WHP Global, the new owner of the Toys R Us brand name. Most notably, Macy's said it would open Toys R Us shops inside more than 400 of its stores in 2022.
On Monday, Macy's revealed that the first Toys R Us shops will open later this month. And by the middle of October, every single one of Macy's 446 full-line stores will have a Toys R Us shop. This initiative looks more important than ever, with inflation and other economic concerns starting to pinch consumers' discretionary spending.
A multipronged collaboration
While Macy's sold toys before partnering with Toys R Us, the category was mostly an afterthought for the storied department-store chain. Working with WHP Global enabled Macy's to become a credible player in the toy business almost overnight.
Upon teaming up with Toys R Us last summer, Macy's immediately began selling a large collection of toys on its e-commerce site. Furthermore, Toys R Us' own website now functions as a marketing funnel for Macy's, with links to purchase each product through macys.com. Macy's also expanded its in-store toy offerings last year, including adding temporary Toys R Us branding.
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These early efforts have been successful. In the first quarter of fiscal 2022, toy sales grew more than fifteenfold at Macy's, thanks to the new Toys R Us partnership.
Full Toys R Us shops arriving soon
Macy's is finally ready to roll out its permanent Toys R Us shops over the next three months. The company says the shops will range from 1,000 square feet in smaller stores to a maximum of 10,000 square feet at 11 flagship stores in key markets. Furthermore, they will be configured so that Macy's can add between 500 and 3,000 square feet of space to its toy departments for the holiday season.
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The new Toys R Us shops have been designed to give customers a reason to visit Macy's stores in person. For example, they will feature demonstration tables for certain toys and a photo-friendly spot with a life-size version of Geoffrey the Giraffe, Toys R Us' iconic mascot.
An important sales driver for late 2022
Opening these Toys R Us shops represents an important piece of the strategy at Macy's to drive sales in the second half of fiscal 2022. While Macy's reported a solid 12.4% comparable sales increase last quarter, it faces much tougher comparisons for the rest of the year. In addition, management has acknowledged a sharp demand slowdown in merchandise categories that had been booming for the past two years, such as activewear, casual apparel, and soft home goods.
For now, strong demand for luxury goods, dressy apparel, and cosmetics is helping Macy's produce solid results. However, persistent inflation, falling asset prices, and satiation of pent-up demand could blunt the company's momentum in those areas over the next few quarters.
Rolling out Toys R Us shops throughout the Macy's store fleet should drive incremental revenue because the retailer hasn't had a big toy assortment, especially in its stores, in recent years. In addition, even if consumers pull back on discretionary spending, they will still buy plenty of toys, especially during the holiday season.
Lastly, adding Toys R Us shops to its stores will help Macy's pull in new customers and induce existing customers to visit more frequently. That extra store traffic will give Macy's more opportunities to rack up sales from impulse purchases. As a result, the new Toys R Us shops will give Macy's a big leg up over rivals in navigating challenging market conditions over the next few quarters.
