Companies can survive the retail apocalypse if they own intellectual property: Former Toys R Us CEO

  • Former Toys R Us CEO Gerald Storch says if a company owns its own supply chain its margin is much richer.
  • Toys R Us, which filed for bankruptcy last fall, could benefit from this model.
  • Such a retailer "can afford to play on the internet," Storch says.
Jerry Storch, former CEO of the Hudson Bay Co.
Adam Jeffery | CNBC
Jerry Storch, former CEO of the Hudson Bay Co.

Retailers can survive the retail apocalypse if they control their intellectual property, said Gerald Storch, CEO of Storch Advisors, a retail advisory firm.

"If [a company] is vertical, the margin is much richer," Storch told CNBC, referring to a company that owns its own supply chain. "You can afford to play on the internet, which in and of itself is more expensive, believe it or not, than operating stores, in terms of delivering the bottom line."

A company that is vertical, Storch said, can control "that price transparency aspect where you see the product everywhere on the internet. The price goes down to the marginal cost."

One company that could benefit from the model: Toys R Us.

Storch, who served as CEO and chairman of the company, said on "Closing Bell" on Friday that the company is still "very valuable" with a lot of intellectual property.

"You can control your intellectual property through your relationship with vendors if you have very good, differentiated offerings that your vendors have to provide," said Storch, who has also served as vice chairman of Target.

But the toy giant isn't having much fun as of late. Last September, the company filed for Chapter 11 bankruptcy. Companies often use this time to reorganize their debt. According to U.S. bankruptcy law, companies have 210 days from the date of filing bankruptcy to renegotiate leases. Friday marked day 172 for Toys R Us, which has approximately $5 billion worth of debt.

Liquidation is a common escape plan if time runs out. On Thursday, reports surfaced that the company may liquidate. The company has begun liquidation sales ahead of planned store closures.

If Toys R Us survived in some form, "it would be very helpful ... to the toy industry," Storch said.
"It plays a very special role for the industry."

But there are currently no bidders for Toys R Us, which accounted for 15 to 20 percent of U.S. toy sales in 2017. A bad holiday season only added to the company's troubles.

If the company goes under, not all of its toy sales will automatically be transferred to other retailers. Some sales will fall through the cracks, according to Jefferies analyst Stephanie Wissink, who wrote a note about the toy industry on Friday.

Storch pointed out that it's a disruptive time in the retail industry. "Not just Toys R Us," he said, "but across the industry. Even retailers that we report are doing well, their margins are down year over year over year."

"The companies that survive and thrive are the companies that are well capitalized and have scale," he said.