The U.S. toy industry has become stagnant. This industry was valued at $22.09 billion in 2013 as compared to $22.03 billion in 2012. A change in customers’ tastes and preferences to tech gadgets from the traditional toys resulted in lower demand for regular toys. Therefore, the toy makers are having a tough time in attracting customers.
An apt example here is that of Mattel (MAT, Financial), one of the leading toy retailers, which is suffering from the effects of declining sales from the last few quarters. Its recently reported third-quarter results were not an exception. The numbers were below analysts’ expectations, resulting in a drop in its share price.
Digging deeper
Due to lower demand for its products, sales dropped 8% to $2.02 billion over last year. This was below the analysts’ expectations of $2.18 billion. A challenging retail environment and an overall decline in children’s interests towards traditional toys have been the key reasons for the fall. Further, the Barbie category has been a poor performer. Barbie sales fell 21% over last year and have been falling for the last two years as girls do not find Barbie attractive anymore.
Even American Girls sales and Entertainment business dropped 7% and 23%, respectively. However, there were some categories which did well during the quarter. Sales in the Other Girls brand inched up by 1% due to high demand for newly introduced Ever After High, Disney Princess and Monster High Dolls.
Even the Boys category was a bright spot as demand in this category surged. Sales of Hot Wheels and Matchbox registered an increase of 4% over the prior year. The company also increased its advertising efforts in order to attract more customers.
Adjusted earnings too declined 15% to $0.98 per share and were below the Street’s estimates. This is mainly because of lower sales, which affected the bottom line. However, the company has taken up a cost-saving initiative, the Operational Excellence 3.0, which should help in boosting the bottom line going forward.
Some hiccups
Along with the weak performance there are some other problems which Mattel will have to take care of. Firstly, Mattel lost the Disney Princess license to its rival Hasbro (HAS, Financial). Disney Princess is doing well and losing its rights would result in a fall in sales. Hasbro got into a deal with Disney in September for this popular product. It includes the Frozen Fashion doll license, which will commence in spring 2016. Revenue from selling such products is $560 million each year. Hence, this will be a major loss for Mattel.
The toy maker also faces stiff competition from peer Lego, which introduced toys related to its Lego Movie, thereby boosting its sales. Also, sales of the Fisher-Price brand have become weak. This is mainly because people think that the premium price charged by the brand is not justified.
Nonetheless, there are some positives which should be considered. For instance, Mattel’s acquisition of MEGA Brands should add to its top line since it has added a new range of products related to construction toys. These toys have become very popular with children recently.
My takeaway
Mattel is indeed undergoing a difficult phase, wherein lower demand for its toys is eating into its profits. Also, the loss of the Disney license will affect its results in the future. However, its recent acquisition to expand its product portfolio looks interesting. New product launches too should give benefits. Further, the upcoming holiday season is the peak selling season for all the industry players and is eagerly looked forward to. Overall, this company needs to be hold onto if investors have already taken positions. If not, then being on the sidelines and waiting for the right time is a prudent thing to do.
