Their tactic: turning their vast real estate holdings into cash generating piggybanks.
Toys R Us, collectively owned by private equity firms Bain Capital, KKR and Vornado Realty Trust, is the latest to offer a glimpse into how a floundering national retailer is morphing into a landlord. On Sept. 17, Toys R Us disclosed that it will open Claire's branded shops in 100 locations scattered across the U.S., U.K., France, Germany, Austria, and Spain. By the end of October, or pre-holiday, there will be 12 Claire's stores of varying size inside of Toys R Us sites in the U.S. Claire's, which peddles commodity items in apparel and accessories for young girls, will essentially become a tenant to Toys R Us.
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The hope from the standpoint of Toys R Us is likely threefold -- to drive traffic to the store base in non-holiday periods, to spur the consumer to shop multiple departments once contained in the store and to collect a steady stream of rent income from Claire's. Toys R' Us could use the pickup in business and cash flow. Per the company's most recent Securities and Exchange Commission filing, the debt-laden toy retailer has lost 70 basis points from its gross margin in 2014 due to intense promotional activity in its learning and seasonal departments. In turn, Toys R Us has burned through cash at a quicker pace than one year ago -- $597 million for the 26-weeks ended Aug. 2 from operations compared to $513 million.
Toys R Us is following closely on the model of Sears, the biggest retail real estate holder around. Since 2010, the fundamentally decaying Sears has inked leases with the likes of Whole Foods (WFM) , Dick's Sporting Goods (DKS) , and Forever 21 to occupy portions of its stores. Whole Foods' newest venture with Sears will open on Sept. 24 at Westfield Countryside Mall in Clearwater, Fla. after the lease was signed in the spring of 2013.
The organic grocer will take over the lower level of Sears and receive the company's West entrance to showcase its signage. There will be no mall entrance for Whole Foods.
Whole Foods and Dick's Sporting Goods working with Sears minimizes build out costs and regulatory hurdles, while Sears feasts on stronger interest in their brands and a steady flow of rental income.