Target races to fill toy void left by rival

A worker arranges boxes of Hasbro  board games on a shelf at a Target Corp. location in Emeryville, California.
David Paul Morris | Bloomberg | Getty Images
A worker arranges boxes of Hasbro  board games on a shelf at a Target Corp. location in Emeryville, California.

Fresh off one of its best quarters in years, Target Corp. wants to step up its toy game ahead of the holiday season — its first without Toys R Us as a competitor.

All remaining Toys R Us and Babies R Us stores shut down earlier this summer after the New Jersey-based retailer declared bankruptcy, creating an opportunity for other retailers in the kids-merchandise space. Target (NYSE: TGT) was a clear beneficiary: Sales of baby clothing and shoes rose nearly 20 percent in the most recent quarter. Hardlines — a category that includes toys — saw high-single-digit comparable growth.

"We're picking up sales that would have gone to Babies R Us and Toys R Us. … We're certainly benefitting from new toy buyers, baby buyers that are coming to Target more frequently." said Target CEO Brian Cornell on a media call following its second-quarter earnings announcement.

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When Toys R Us and Babies R Us went belly up, it meant the closure of nearly 800 stores throughout the country. In a report released in March, Seth Sigman, an analyst with Credit Suisse, concluded that 90 percent of Toys R Us stores and 96 percent of Babies R Us stores had a Target within five miles.

Cornell said Target is well-positioned to take market share in this category, and is increasing inventory now to prepare for a surge that is already showing up in stores.

"We are investing in categories like toy and baby where we know we have this big opportunity ahead of us," Cornell said in an interview with CNBC. "We are going to make sure we are taking more than our fair share of that market share."

Baby products have been one of Cornell's key areas of focus since taking over in 2015, as Target has revamped its product lineup in areas such as baby goods, furniture and fashion.

But not everyone is sold on a toy-focused Target.

In February, several Target Corp. investors told Reuters they think the company should take a step back from trying to boost its toy sales. Four investors told Reuters that putting capital towards the toy category would be a waste as the retailer competes against a growing threat from Amazon.com.

Brian Yarbrough, a senior analyst with St. Louis-based Edward Jones, warns that toys can be a lower margin business — and a competitive one, as other retailers like Walmart and Kohl's put significant investments in their toy offerings. However, he believes that Target's toy momentum will likely continue into the holiday season, through this time next year.

"The hope is that these customers will be new to Target, and this will get them to shop at other categories," Yarbrough said.

Beyond simply gaining market share from Toys R Us, Target expressed interest earlier this year in the company's real estate. Back in March, the company bid on a former Toys R Us location in Kendall, Fla.