Strong Holiday Sales Boost Toy Makers

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

Between the rise of video games and the popularity of cell phones and tablets among children, one might expect the US toy industry to be experiencing a robust decline. However, according to NPD, holiday sales were strong enough to propel the toy market to $16.5 billion in sales during 2012, down just $100 million compared to 2011. The report claims dollar sales and unit sales surged 18% and 10%, respectively, during the final two weeks of December, driving sales 1.3% higher year-over-year for the busiest month of the year.

Leapfrog (NYSE: LF), which focuses primarily on educational toys, topped the 'best-selling toy list' with 4 out of the 10 best sellers as well as 3 out of the top 4 (including the very best, Leapster Explorer Licensed Software Asst). With the emphasis on early childhood learning and development, we at Valuentum do not think this trend will slow anytime soon, but shares of the company are already up 80% during the past year, capturing the company’s solid fundamentals.

Building sets were the strongest area of growth in 2012, with sales up 19.7% compared to 2011. The obvious beneficiary is privately-held toy maker Lego, which we think is riding licensing deals and the spatial/educational aspect of its products to higher sales. Valuentum Dividend Growth Newsletter portfolio holding Hasbro (NASDAQ: HAS) owns the rights to Lincoln Logs, though K’Nex is now responsible for development and distribution. We doubt increasing building set sales will move the needle for the country’s second largest toy maker.

However, Hasbro did claim 2 out of the 10 top spots on the 'best-selling toy list' of 2012. The Beyblade Metal Fusion, a toy capitalizing on one of the more popular names in anime, was the second-hottest seller of 2012, while the tried-and-true Easy Bake Oven (the Ultimate type) was also among the top sellers. Licensing the hottest youth programming is a trend that’s been around for at least the past 35 years, and one that will not be easily replaced by electronics (unless there is a drastic shift in play habits, which we’re not expecting). The Furby, which many expected would surge in popularity following its re-release in 2012, was nowhere to be found on the list. Hasbro has licensed much of the popular Angry Birds Star Wars toys, but not the plush toys, which rank atop Amazon’s  best seller list.

In contrast to solid results from building sets, vehicle toy sales tumbled on a year-over-year basis. Although this isn’t great for Hasbro due to its ownership of Tonka, we think Mattel (NASDAQ: MAT) could experience more pain since it owns the top brands in the category, Hot Wheels and Matchbox. Perhaps the spike in auto sales of the non-toy variety will lead to a resurgence in vehicle toy popularity, but we’re uncertain at this time. Mattel’s Barbie remains relatively popular, but Disney’s (NYSE: DIS) increased efforts to monetize its princesses might be having a negative impact.

Speaking of Disney, several of its brands—which now include Star Wars, the Cars franchise, Toy Story, The Avengers, as well as its entire catalog of films—remain exceedingly popular with children. In fact, we now wouldn’t be surprised to see the entertainment giant take a run at Hasbro or the privately-held Lego, which recently eclipsed $3.5 billion in annual sales. We believes both would mesh well with Disney’s current business model, and we think Disney could do a much better job of producing films for Transformers and GI Joe. An acquisition could drive Hasbro closer to our fair value estimate, but we do not peg it as a likely catalyst just yet.

Hasbro remains Valuentum's favorite name in the leisure space, and we love its annual dividend yield of 3.8% at current levels. Not only does it have a better yield than Mattel, but we think the stock has more upside from its current share price. We’re happy to hold shares of Hasbro in the portfolio of our Dividend Growth Newsletter.

Valuentum has no position in any stocks mentioned. The Motley Fool recommends Hasbro, LeapFrog Enterprises, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro, Mattel, and Walt Disney. 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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