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Toys & Games Industry Outlook: Toys "R" Us Liquidation Woes Stay

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The Zacks Toys - Games – Hobbies industry primarily includes companies that design, manufacture and market a variety of toys products and games. Some of the companies in the industry develop and market content as well as services on video game consoles, personal computers and mobile.

Let’s take a look at the industry’s three major themes:

•    Most of the traditional toy makers have been bearing the brunt of soft consumer demand and consequent sales crunch. The U.S. toy industry dealt a heavy blow when the country’s largest independent toy seller, Toys "R" Us, filed for bankruptcy last September. Adding to the concerns, Toys “R” US said that it is liquidating its entire U.S. operation, leaving traditional toymakers like Hasbro, Inc. (HAS - Free Report) , Mattel, Inc. (MAT - Free Report) and JAKK Pacific (JAKK - Free Report) in a mess, as the businesses of these companies were considerably dependent on Toys "R" Us.

•    The traditional toys are failing to compete with a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices. As a result, the industry has been facing lower demand over the last few quarters. Another factor affecting demand is age compression. Kids are moving on to higher-age toys much faster than before. For instance, demand for some toys that were preferred by kids aged three to nine years previously has narrowed down to the band of three to six years.

•    In order to fight sales slump due to the liquidation of Toys "R" Us, companies in the industry are banking on new distribution methods, development of digital-play components, exploration of ventures with other industries and focusing on international expansion. The companies are also looking to enter into deals for greater distribution of their iconic products. Though traditional toy makers are struggling at the moment, industry players like Activision Blizzard, Inc. , Electronic Arts Inc. (EA - Free Report) and Glu Mobile Inc. , which produce digital games, are gaining from the trend reversal.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Toys – Games – Hobbies Industry is grouped within the broader Zacks Consumer Discretionary Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. The Zacks Toys – Games – Hobbies industry currently carries a Zacks Industry Rank #229, which places it in the bottom 11% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In a year, the industry’s earnings estimate for the current year has gone down 16.7%.

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half in seven of the past eight weeks.


 

Despite the industry’s drab near-term prospects, we will present a few Toys – Games – Hobbies stocks that one can hold on to. But it’s worth taking a look at the industry’s shareholder return and current valuation.

Industry Lags on Stock Market Performance

The Zacks Toys – Games – Hobbies industry has lagged the broader Zacks Consumer Discretionary Sector as well as the S&P 500 index over the past year.

The industry has gained 5.2% over this period compared to the S&P 500 index’s rise of 10.4% and the broader sector’s increase of 6%.

One-Year Price Performance


 

Industry’s Current Valuation

Comparing the industry with the S&P 500 index on the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing the industry, we see that the industry is trading at 31.98X, higher than the S&P 500’s 17.85X and the sector’s 20.17X.

Over the last five years, the industry has traded as high as 31.98X, as low as 15.3X and median of 24.20X, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio


 

Bottom Line

It is highly unlikely that the industry will recover in the near term as the Toys "R" Us liquidation will continue to cast a shadow on the coming quarters. However, initiatives like product launches and shift to more technology-driven toys to revive sales bode well for the industry over the long run. However, costs related to these initiatives will hurt margin in the near term. Further, costs related to marketing and promotional initiatives and for cleaning up inventories coupled with the development of digital platforms are likely to keep margins under pressure.

Below we have discussed three stocks that investors may want to hold on to for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Activision Blizzard: This Santa Monica, California-based company has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2018 earnings indicates year-over-year growth of 16.2%. The company has an estimated long-term earnings growth rate of 15.1%. The company has an average positive earnings surprise of 25.2% for the trailing four quarters.

Price and Consensus: ATVI



Hasbro: This Pawtucket, Rhode Island-based company is a Zacks Ranked #3 stock. The company has an estimated long-term earnings growth rate of 11.7%. The company’s earnings beat estimates in three of the past four quarters, the average beat being 8.1%.

Price and Consensus: HAS



Glu Mobile: This San Francisco, CA-based company has a Zacks Rank #3. The Zacks Consensus Estimate for 2018 earnings reflects year-over-year growth of 156.8%. The company has an estimated long-term earnings growth rate of 15%.

Price and Consensus: GLUU


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Hasbro, Inc. (HAS) - free report >>

Mattel, Inc. (MAT) - free report >>

JAKKS Pacific, Inc. (JAKK) - free report >>

Electronic Arts Inc. (EA) - free report >>

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