Toys 'R' Us sale could bring Disney stores back to B.C.

Disney last month closed stores its final three stores in Metro Vancouver

toys vertical bowmac - rk
Toys “R” Us opened on West Broadway in the late 1990s and placed its sign on top of a heritage-protected sign for the former Bowell MacLean (BowMac) Motors, which billionaire businessman Jimmy Pattison commissioned in 1959 | Rob Kruyt

With Toys "R" Us Canada announcing August 19 that it is set to have a new owner, the venerable toy retailer could be looking to forge some new partnerships to strengthen its business model, a retail analyst told BIV.

One of those partnerships could be with global entertainment giant Walt Disney Co. (NYSE:DIS), Retail Insider Media owner and retail consultant Craig Patterson told BIV.

He noted that Disney in the past month closed its Metro Vancouver stores at CF Pacific Centre, Metropolis at Metrotown and Guildford Town Centre.

The Mickey Mouse creator now only operates three stores in Canada – all in Metro Toronto – and Patterson expects those stores to close soon.

"Disney is not going to have a physical presence in Canada in terms of retail," he said.

"Putting kiosks within Toys 'R' Us stores would certainly give a boost to Toys 'R' Us, in terms of giving it a significant brand that could work."

BIV asked Toys "R" Us Canada's slated owner-to-be, Putman Investments principal Doug Putman, whether he might partner with Disney and he sent back a statement saying, "if and when there are facts or news to share, we will."

He outlined some aspects of his vision for the retailer that has 81 locations, including some branded Babies "R" Us.

"The vision is to make Toys ’R’ Us a more fun environment for kids and parents to come to – a place with activities and characters in costume," he said. "We have to view the store from the eyes of a child.  We also will want to look at expansion. More stores need to open. Finally we need a better e-commerce platform that is more customer-centric."

Putman is expected to buy the retailer's operations from Toronto-based Fairfax Financial Holdings Ltd. (TSX:FFH), which is a diversified venture headed by billionaire Prem Watsa.

Putman also owns Sunrise Records and Entertainment, which is a 44-year-old record store chain that also sells CDs, games and other products at 85 bricks-and-mortar locations, and online. 

He has also been growing the tea retailer T. Kettle to what its website lists as 40 Canadian locations, and six in the U.S.

Putman has purchased leases from struggling tea purveyor DavidsTea, which closed the lion's share of 166 Canadian and 42 American stores in the past year. DavidsTea now only operates one store in B.C., at Pacific Centre.

Fairfax flips Toys 'R' Us

Fairfax has owned Toys "R" Us Canada since 2018, when it outbid others, and doled out $300 million to buy the venture from its American namesake parent, which filed for Chapter 11 bankruptcy protection in September, 2017.

"The U.S. parent disposed of the Canadian operations not because they were a losing proposition, but because its focus was the U.S.," retail analyst, and DIG360 owner, David Gray told BIV.

"The Fairfax-supported takeover of Toys 'R' Us Canada, which included the senior management team, has brought stability to the operation, but Fairfax is an equity firm, not an entrepreneurial driver of renewal."

Gray said he believes Putman has his work cut out for him in order to modernize the business. That in itself is sufficient reason for Watsa, and Fairfax, to want to exit, he added.

With stiff competition from e-commerce giant Amazon.com Inc. (Nasdaq:AMZN), Toys "R" Us' competitive advantage could be its physical presence, as long as that presence is expreriential and inviting, he added. 

The good news for Putman is that toy sales have been a retail niche that has done comparatively well during the pandemic. 

Neither Fairfax nor Putman have yet revealed the value of the sale, but the transaction is presumed to be significantly less than $300 million because Fairfax gets to keep the swath of real estate that it purchased as part of its 2018 pact to buy Toys "R" Us Canada.

Fairfax also gets to keep what Watsa said in a release is a "continuing royalty stream," although he did stipulate exactly how much in royalties Fairfax expects to be entitled to.

After the U.S. parent sold its Canadian division, which had long been run independently, it closed all its stores, restructured, and readied for a rebirth.

The first tentative steps were to open two stores in 2019, in New Jersey and in Texas, but those outlets closed during the pandemic, leaving the company with no physical presence.

Curiously, the American Toys "R" Us also released major news on August 19 about its strategic vision – news that DIsney might have been watching. 

Instead of opening its own branded storefronts, Toys "R" Us plans to open kiosks in up to 400 Macy's Inc. (NYSE:M) locations.

That news, plus Macy's Inc. reporting stronger than expected earnings, sent Macy's Inc.'s share price up 19.6% on August 19, to US$21.61, with intra-day trading pennies shy of its US$22.30 52-week high. The shares then hit a new 52-week high earlier this morning. 

gkorstrom@biv.com

@GlenKorstrom