Anatomy of a Toy Slump
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a previous article I discussed the Perils of Nostalgic Investing in which affinity for a product such as Hasbro’s (NASDAQ: HAS) Transformers or Mattel’s (NASDAQ: MAT) Matchbox cars can lead to faulty assumptions that the company that makes these products must be a good investment. I noted that it is important to do one’s research before taking the plunge.
I also noted that there were some opportunities for Hasbro with the then up and coming Battleship movie based on the popular game Battleship and the future release of G.I. Joe: Retaliation, which is based on the G.I. Joe toy line. When researching for this story, I decided that Hasbro and Mattel are suffering a slump brought on basically by being in between popular movies and the stronger dollar.
The Inter-Movie Slump
The first movie opportunity, Battleship, was not a blockbuster hit compared to The Avengers and The Dark Knight Rises. Hasbro’s consolidated net revenue declined 8% for the six months ending July 1, 2012. Hasbro did note an up-tick in the Battleship portion of its revenue during that time frame so the movie did some good in promoting sales of the game but probably not as well as anticipated.
The second opportunity I saw for Hasbro is the anticipated release of G.I. Joe: Retaliation. I thought this would generate interest in their G.I. Joe product line and thus boost consolidated revenues. However, at the last minute Paramount pictures decided to delay the release of the movie from June 2012 until March 2013 in order to convert the movie to 3D. This will extend a delay in the spike of interest in G.I. Joe products to well past the holiday season. The release of the latest Joe movie before the holidays would have created interest in the product in the summer season in addition to boosting the all important holiday sales.
Transformers sales have also declined as we move further away from Transformers: Dark of the Moon (2011) and wait for a new sequel to be made. Animated series such as Transformers Prime and Transformers: Animated do generate interim interest in the products, but don’t do justice to going to a movie theater and seeing live action robots in 3D.
Mattel also saw a 1% decline in its consolidated revenue for the first half of 2012, mostly due to a decline in sales of Cars 2 revenue. As we move further from the Cars 2 release date the products associated with this movie are going to experience a natural decline. Mattel will need more movie licenses to boost its revenue.
The “Other” Products
Hasbro sales have declined due to a drag effect created by its other lesser known brands. In Hasbro’s game division, increases in sales brought about by Magic: The Gathering, Battleship, and Duel Masters have been dragged down by lower sales in its “other” games. Growth in the well known brand name My Little Pony has been offset by lower sales of Furreal Friends and Littlest Pet Shop.
As noted above, the Cars 2 products, which in my opinion are the “other product” for Mattel, offset gains in revenue made by Barbie, Hot Wheels, and American Girl. So, once the Cars 2 product goes out of fashion maybe the core brands could bolster Mattel’s growth in the holiday season.
The Impact of a Stronger Dollar
The dollar has gained strength in recent months, probably due to a lack of interest in the euro. As a result, both Hasbro’s and Mattel’s decline in revenue and profitability have been hastened. Hasbro has experienced a 3% sales increase in its international segment. Hasbro’s international sales of $650 million would have been $42 million higher if it wasn’t for adverse foreign currency translations. Mattel’s revenue was down 1% for six months ending June 30, 2012 due to “unfavorable currency exchange rates of 3%.”
Even though Battleship was not a big hit in the movie theaters it will probably boost sales for Hasbro in a small way for a while. Paramount’s decision to move G.I. Joe: Retaliation to March 29, 2013 will probably create a double whammy of not having exposure for the G.I. Joe lineup both in the normal and all important holiday season for 2012 and of less popularity for its toy line in 2013 due to a disheartened audience having to wait. Gains in Mattel’s core brands could bolster top and bottom line growth as products based on Cars 2 decline due to the fading memory of the movie. If the dollar continues to strengthen due to the euro crisis and other reasons, the political risk of these two companies will remain high. As much as I like Transformers and Matchbox cars, I am going to continue to play wait and see for Hasbro and Mattel.
stockdissector has no positions in the stocks mentioned above. The Motley Fool owns shares of Hasbro and Mattel. Motley Fool newsletter services recommend Hasbro and Mattel. 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.If you have questions about this post or the Fool’s blog network, click here for information.