Here's Why These Toymakers Might Kill Your Christmas Spirit

As Christmas is just around the corner, investors might take more interest in the toys and games space. The holiday season usually marks the most profitable time of the year for the industry, with the second half of the year accounting for two-thirds of net sales.

As per the latest report from The NPD Group, Inc. an American market research company, the U.S. toy industry saw a 3% rise in its dollar sales in the first nine months of 2017. As per a July report by the NPD Group, sales are estimated to grow approximately 4.5% in the full year. Also, the release of popular flicks like Star Wars: The Last Jedi is likely to fuel industry growth.

However, leading U.S. toymakers like Hasbro, Inc. (NASDAQ:HAS) , Mattel, Inc. (NASDAQ:MAT) and JAKKS Pacific, Inc. (NASDAQ:JAKK) do not conform to the overall rosy industry background. Here’s why —

Toy companies like Hasbro have been grappling with declining demand for traditional toys for quite some time now.

The recent Toys ‘R’ Us bankruptcy aggravated matters. The company saw a decline in quarterly revenues and operating profits in the third quarter. Hasbro had been selling roughly 9% of its total inventory at the chain. The bankruptcy filing could have left the company with $60 million worth of unsecured payments. In fact, it has disrupted Hasbro’s growth plans for the holiday and has even paused shipments for a short period. Resultantly, the company expects fourth-quarter revenue growth in the range of 4% to 7% year over year, lower than its earlier projections.

We note that, with a market capitalization of $11.94 billion, Hasbro is on investors’ radar owing to its size and liquidity. The company’s earnings estimate revisions clearly reflect the disappointment among investors regarding the stock’s prospects. Over the past 60 days, current-quarter and year earnings estimates have gone down 8.9% and 1.2%, respectively.

Further, shares of the company have underperformed the industry year to date. The stock has gained 23.2% as compared with the industry’s growth of 44.6%.

However, in order to navigate the macro challenges, Hasbro focuses on innovation in products and major theatrical releases. Increased focus on gaming and strategic partnerships continues to be this Zacks Rank #3 (Hold) company’s key growth drivers.

Mattel, the largest toy retailer in the United States, foresees a weak holiday season as revealed in a recent regulatory filing. Despite owning prominent brands like Barbie, Fisher-Price and Fijit Friends, Mattel expects at least mid-to-high single-digit decline in 2017 sales compared to 2016.

The company is anxious about its key retail partners opting for tighter inventory management. Moreover, Toy Box-related challenges and certain underperforming brands are likely to dent the top line in the to-be-reported quarter.

Moreover, Mattel has been particularly affected by the Toys ‘R’ Us bankruptcy as it resulted in a year-over-year decline in third-quarter 2017 revenues and profits. In fact, since the company’s gross margins included the associated cost of goods sold, the net sales reversal in Toys ‘R’ Us accounted for approximately one-fifth of the year-over-year decline in gross margin. The effect of the bankruptcy is expected to linger in the upcoming quarters as well.

The company reported a 620 basis points (bps) year-over-year decline in gross margins in the first nine months of 2017. This decline, owing to unfavorable product mix, higher freight and logistics expenses and lower fixed cost absorption, is expected to reflect in fourth-quarter 2017 results as well. A persistent decline in the top line is likely to result in gross margin deterioration due to higher inventory write-downs and discounts offered to clear inventory.

Meanwhile, over last 60 days, earnings estimates for the current quarter have gone down 30.8%. The consensus estimate for the bottom line has declined from earnings to loss for the current-year in the same time period. Also, year to date, shares of the company have lost 41.4% as against the industry’s gain.

Hence, this Zacks Rank #5 (Strong Sell) company, which generally rakes in about 40% of its annual sales during Christmas, is likely to face a decline in sales and margins owing to the above-mentioned dampeners.

JAKKS Pacific has also been bearing the brunt of declining demand for traditional toys. The bankruptcy also compelled the company to slash its 2017 guidance. JAKKS Pacific expects to incur a net loss and record negative earnings per share in the full year. Also, though the company continues to expect positive EBITDA for the year, the figure is anticipated to decline year over year. Though the company expects Toys ‘R’ Us to be a healthier retailer 2018 onward, the near-term effects of the bankruptcy and consequent pause in shipments might hamper JAKKS Pacific’s performance.

We note that over the last 60 days, the consensus estimate for the bottom line has declined from earnings to loss for current quarter and year.

Also, year to date, shares of the company have lost 50.5%, widely underperforming the industry.

JAKKS Pacific carries a Zacks Rank #4 (Sell).

Even though the above-mentioned stocks are likely to dampen investor sentiments, a look at Nintendo Co (T:7974)., Ltd. (OTC:NTDOY) can be comforting. The company sports a Zacks Rank #1 (Strong Buy) and its current-year earnings are expected to increase 112.8% year over year. You can see the complete list of today’s Zacks #1 Rank stocks here.

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