NEW YORK ( TheStreet) -- While nearly every player in our global economy has been forced to get serious in these austere times -- tightening inventory, closing stores, laying off employees -- a few retailers are discovering the recuperative powers of a little old-fashioned fun and games. And investors looking for winning retail stocks in the second half of the year would do well to put their money with the ones that have wised up to the trend. In recent years, traditional toys had been losing the commerce war to video games, which have grabbed the attention of children at an increasingly younger age. But the recession, of all things, has reversed that trend. Indeed, video-game sales plunged 29% in July to $848.9 million, the fifth straight month the sector has seen a decline, as parents forego electronic toys -- and their hefty price tags -- for more wallet-friendly classics like board games, puzzles and action figures. While overall toy sales slipped 2% to $7.81 billion in the first half of the year, action figure sales jumped 13%, arts and crafts grew 6%, building sets soared 20% and puzzles and games rose 5%. Meanwhile, sales of Web-connected toys plummeted 43%. And it's not just the big toymakers -- Hasbro ( HAS) and Mattel ( MAT) -- that have benefited from the shift. Retailers that have incorporated such toys to their otherwise moribund sales floors are boosting their bottom lines.
One factor feeding the trend is that the market is virtually void of specialty toy stores. KB Toys filed for bankruptcy last year (and was later acquired by Toys 'R' Us) while Wal-Mart Stores ( WMT), which sells a third of all toys in the United States, recently shrunk the amount of space it allocates to toys during the off season. Thus, a gaping hole is waiting to be filled by other retailers. And while it's unlikely any one player could usurp Wal-Mart as the biggest toy retailer in the country, its limited selection does provide other companies an opportunity to pick up market share. Sears ( SHLD), for one, isn't wasting any time. Last month the department store announced that it will incorporate games and gadgets in 20 of its stores. And while the space allotted to toys is small -- only 1,600 square feet, or 1% of its overall selling space -- Sears' strategy of combining newer toys with classics like kazoos and jack-in-the-boxes seems well-calibrated to the current consumer mindset. "As more families stay home and spend time with each other, these classics provide a perceived value for the money spent," says toy expert Richard Gill, an industry veteran who helped develop such classic games as Pictionary and Trivial Pursuit, among others. Sears, it's worth noting, once dominated the industry -- especially at its Kmart chain. Today, Kmart ranks behind Target ( TGT)and Toys 'R' Us in toy sales. Sears is now hoping that its new toy departments will help the company regain its former status; if the launch within the first 20 stores is successful, management plans to roll toys into more locations. Traditional book retailers like Borders ( BGP) and Barnes & Noble ( BKS) are also joining in the fun -- expanding their selection of board games and educational toys. In its second quarter, Borders cut its music and DVD inventory in half, freeing space for such higher-margin fare as a children's department -- which, of course, includes toys.
Amazon.com ( AMZN), not surprisingly, is also ramping up its selection of discount toys, Needham analyst Sean McGowan says. Not everyone, of course, can be a winner. On the losing side there is Macy's ( M), which lost its FAO Schwarz outlets in May when Toys 'R' Us bought the flailing high-end toy store. Macy's had operated FAO Schwarz departments in 260 of its stores, but come November, these items will be swept clean. That is what you'd call bad timing -- akin to selling your hotels on Park Place just before your opponent lands on it. According to Gill, the toy sector should see a 15% rate of growth over the next five years. It might behoove Macy's, in other words, to get back in the game. -- Reported by Jeanine Poggi in New York Follow TheStreet.com on Twitter and become a fan on Facebook.