Toy Manufacturers: 3 Picks

Louie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The toy industry is in the doldrums. Retail toy sales have flattened worldwide during the last few years. In the 21st Century, age “compression” has made toy companies face new competitors and become just one part of the greater "play industry," which consists of those who create immersive digital worlds, developing apps, video games, and manufacture devices. It seems kids nowadays are not amazed by new Barbies or cars and have new interests. Moreover, the economic crisis in developed markets puts a question mark on the inventory position of retailers.

Let’s see how three major players are doing in this difficult context.

Expansion plans to reduce exposure

Hasbro (NASDAQ: HAS) offers a wide range of toys, games and licensed products under well-known brands, not only for children but for the family in general as well.

Net revenue from this quarter was $663 million, up 2.2% compared to last year. The categories that helped this moderate improvement were games, girls and preschool, while boys fell 20%. This shows a strong brand recognition and product lineup. However, we have to pay attention to the evolution of the boys segment, since it has been one of Hasbro’s growth engines for years. Another negative aspect is the fact that the company is quite exposed to Europe, having obtained 28% of its revenues in 2012 from that region. This area of the world remains sluggish, and could easily impact Hasbro in the next quarters.

The main strategy to increase profits in the short term is a company-wide cost-saving initiative, which plans to save $100 million per year by 2015. In the mid-term, a joint venture with the Discovery TV show "The Hub" should be able to increase revenues and brand awareness. Plus, Hasbro is looking at building long-term alliances with companies present in the digital world. This is a strategic market in terms of future growth.

Hasbro has expansion plans to broaden its reach in the emerging markets. This attempt will generate advertising costs, but will prove to be significantly beneficial in terms of reducing exposure to the sluggish developed markets. I strongly support this strategy as it proves the company is willing to maintain its position and grow in the medium/long term.

Still expanding

Mattel (NASDAQ: MAT) holds an industry-leading position in the design, manufacture and marketing of family products and toys.

Even if these are not the best days for the industry, Mattel has shown during the first quarter of 2013 a strong balance sheet and sales growth of 7% year over year, beating estimations. The main contributors were The American Girl and Monster High products, as well as the expansion in emerging markets and strong sales in Europe. However, core Fisher-Price products did not perform well, suggesting the need for brand repositioning.

One of the characteristics that helps Mattel’s success is its strong brand recognition, being the manufacturer of premier toys such as Barbie and Hot Wheels. Furthermore, the acquisition of HIC Entertainment will enable Mattel to retain and expand its toy licenses.

As for initiatives, the Global Cost Leadership Program, initiated in 2008, and Operational Excellence 2.0 proved to be successful at reducing costs. For that reason, the company decided to carry out Operational Excellence 3.0 during 2013 and it is expected it will benefit the company saving $150 million. These savings will help expand its gross margin, which has been improving for four years in a row. Earnings will be boosted as well thanks to Mattel’s optimization of its entertainment alliances with powerhouses such as Disney, Pixar and Nickelodeon.

The strong balance sheet has enabled Mattel to enhance shareholder value, repurchase shares, distribute dividends, and to pursue growth opportunities. These are all good signs for investors. After observing the company’s strategy related to saving, expanding, building new franchises and strengthening traditional brands, I believe Mattel will manage to keep profiting despite the current situation.

Pressured by low sales

Compared to the other two companies, Jakks (NASDAQ: JAKK) is a fairly new company, being founded in 1995. Its segments are traditional toys, craft/activity/writing products, and pet products.

The company’s revenue for the first quarter of 2013 grew 6.4% year over year to $78.1 million. However, its gross margins suffered a significant drop of 29.9% mainly due to increasing operating and marketing costs. In addition, loss per share reached $1.26, more than doubling the loss in the year-ago quarter. The company’s efforts might not be enough to reverse its situation.

Jakks is suffering a lack of demand in some of its key products. Some new major products, such as Monsuno and Winx Club, didn’t have the success the company expected, increasing inventories. Moreover, in the short term there is only one significant launch, Dreamplay products, which if successful, will impact profits only a few quarters from now. I expect that the next quarter will show the same pattern, as it is seasonally weak.

Conclusion

Both Mattel and Hasbro are showing healthy balance sheets and good strategies for the short and long run. I think they are capable of dealing with age compression and the economic crisis that is impacting sales. The strongest initiative for Mattel is its partnerships with household names in the entertainment industry, which, combined with its successful bottom-line improvements, should work well. As for Hasbro, long-term alliances in the digital world and its expansion in emerging markets will provide a good outlook for the future.

On the other hand, I would recommend to sell Jakks shares, considering the company’s short-term difficulties. Margins are diminishing, and there are no novelties in its product launches that could help boost demand anytime soon.

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Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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