Analyst: Toys R Us Closures Could Be Positive Catalyst For Bed Bath & Beyond

Bankrupt toy store Toys R Us is reportedly looking at closing another 200 stores and lowering its headcount after a poor holiday season. If this is the case, Bed Bath & Beyond Inc. BBBY's children's concept, buybuy BABY, stands to greatly benefit, according to Loop Capital.

The Analyst

Loop Capital Markets' Anthony Chukumba maintains a Hold rating on Bed Bath & Beyond's stock with an unchanged $23 price target.

The Thesis

Toys R Us' ongoing struggles are likely to result in a complete liquidation of the company, including its core stores and Babies R Us concepts, Chukumba said in a Tuesday note.

Over 90 percent of Buy Buy Baby's 118 stores are within a 10-mile radius of a Babies R Us location. It's reasonable to assume that Babies R Us shoppers are "more likely" to shop at Baby's R Us stores than large-format discounters or online channels given the similar store format, merchandise selection and customer service level, the analyst said. 

Even working under the assumption of a 30-percent sales transfer rate and a 20-percent incremental operating margin, the complete closure of Toys R Us would add as many as 200 basis points to Bed Bath & Beyond's comparable sales growth and contribute 25 cents of annual diluted earnings per share, Chukumba said. 

Bed Bath & Beyond does continue to suffer from heightened online competition, which implies that a bullish stance on the stock isn't yet justified, he said.

The eventual closures of Toys R Us cannot be accurately predicted, and the toy store's liquidation sales will pose a temporary headwind to Bed Bath & Beyond, according to Loop Capital Markets. 

Price Action

Shares of Bed Bath & Beyond were trading lower by 0.5 percent Tuesday afternoon.

Related Links:

What Toys R Us Store Closures Could Mean For Mattel, Hasbro

Toys 'R' Us CEO's Turnaround Plan: Become More Of A 'Toy Store,' Less Of A 'Garage Sale'