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Toys "R" Us, Footstar woes benefit Foot Locker, Office Depot

Office Depot announced plans to purchase 124 former Kids "R" Us Stores from troubled conglomerate Toys "R" Us for $197 million, but only 50 or 60 of those stores will actually become Office Depots, says Deutsche Bank Securities analyst Michael Baker. He says the former Kids "R" Us stores to become Office Depots will likely be concentrated in the Northeast and Mid-Atlantic -- markets where the office supply chain has the lightest existing store base. Boston; Hartford, Conn.; Nassau, N.Y; several cities in New Jersey; Philadelphia and Cleveland are the markets most likely to see conversions.

Forty-seven of the acquired stores purchased by Office Depot were owned by Toys "R" Us; 55 were leased and 23 had ground leases. Converting the stores could take as long as two years, and Office Depot hasn't announced its plans for the stores that won't become Office Depots. Toys "R" Us still has 22 former Kids "R" Us stores to unload.

Vacant real estate isn't the only thing beleagured retailers are surrendering. Bankrupt footwear giant Footstar is giving its competitors a boost by closing stores. Venator Group-owned Foot Locker's market position is likely to grow stronger now that Footstar is closing 165 under-performing stores, including all 88 of its Just For Feet stores and 77 of its 429 Footaction stores. Fooststar is currently negotiating with landlords for substantial occupancy cost reductions at the rest of its stores, and may close an additional 50-100 Footaction stores in A and B-class malls if they're not successful, says Wells Fargo Securities analyst John Shanley.

"The rationale behind Footstar's selection of store closings is not at all clear to us, as Footaction stores in very profitable urban malls are being shuttered at the same rate as those in suburban locations," he says in a report. For example, Footaction is closing stores at Natick Mall in Natick, Mass., and at Dallas' The Galleria. Of the 75 mall-based Footaction closings, 71 of the malls contain Foot Locker stores.

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