MAT Or JAKK: Which Toymaker Has Better Chances Of Survival? (revised)

The U.S. toy industry was shaken by the Toys ‘R’ US bankruptcy that occurred in 2017. The overall industry started regaining its strength but suffered a heavy blow when Toys ‘R’ US liquidated its operations in the United States.

Being the largest toy retailer, Toys “R” US could not keep up with the changing dynamics of the retail landscape, where online shopping is being preferred over traditional brick-and-mortar stores. Subsequently, it faced intense competition from the likes of Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) , and failed to compete on price and shopping convenience. Toys ‘R’ Us was burdened with $5-billion debt.

Leading U.S. toymakers like Hasbro, Inc. (NASDAQ:HAS) , Mattel, Inc. (NASDAQ:MAT) and JAKKS Pacific, Inc. (NASDAQ:JAKK) were much affected by the setback as a considerable portion of their revenues were generated from sales to Toys "R" Us.

Both Mattel and JAKKs Pacific currently carry a Zacks Rank #3 (Hold). Let’s find out which toymaker has better chances of a comeback. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Where Does Mattel Stand?

Though Mattel has seen growth in its flagship Barbie brand year over year both domestically and worldwide, the company has recently lost its Disney Princess and Frozen lines to Hasbro. Moreover, Toys ‘R’ Us used to constitute roughly 15-20% of Mattel’s domestic sales, which need to be revived by the company.

The Zacks Consensus Estimate stands at a loss of 97 cents per share for the current year while sales are estimated to fall 8.4% year over year. Mattel’s net profit margin in the trailing 12 months is a negative 18% compared with the industry’s 6.2%. Moreover, a negative return on equity (ROE) of 65.3% compares unfavorably with the industry’s 13.5%.

Mattel’s suspension of its quarterly dividend of 15 cents per share, starting in the fourth quarter of 2017, did not go well with investors. Shares of the company have lost 24.4% in the past year compared with the industry’s collective decline of 19.1% during the same time frame.

Although Mattel is trying to focus on product innovation and fortify its digital capabilities, with better execution of marketing and promotional initiatives, we need to wait and see if the company can do better in the near term.

Is JAKKS Pacific Better Off?

JAKKS Pacific’s scale is much narrower than that of Mattel. Further, the company’s dependence on Toys ‘R’ Us was much less. While this may be a reason for the company’s better survival, we note that JAKKS Pacific is plagued with soft consumer demand. The consensus estimate for sales in 2018 indicates a year-over-year decline of 8.7%. Additionally, current-year loss is estimated to be $1.47 per share.

Meanwhile, the company has a negative ROE of 56.1% while its net margin in the trailing 12 months is a negative 12.2%. The company’s shares have declined 9.4% over the past year.

However, JAKKS Pacific has emerged as a diversified consumer products company, buoyed by a string of acquisitions over the past several years. We consider the company’s ability to successfully identify, close and integrate acquisitions to be one of its primary competitive advantages. Meanwhile, JAKKS Pacific has collaborations with Disney, Skechers, Nickelodeon, Cabbage Patch Kids and Chico to manufacture toys, and merchandise related to these brands. The company recently extended its global master toy licensing partnership with Nintendo, which positions it better among peers.

Bottom Line

It is needless to mention that none of the companies holds any promises in terms of earnings growth in the current year. However, we believe that JAKK Pacific is placed better than Mattel when it comes to debt and dependence on Toys ‘R’ US. Further, JAKK Pacific is ahead of Mattel in terms of product innovation and acquisitions, which may help it revive its flagging fortunes.

(NOTE: We are reissuing this article to correct an error. The original version, published yesterday, Tuesday, November 27, 2018, should no longer be relied upon.)

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