Back to top

Image: Bigstock

Will Toys "R" Us Liquidation Change Hasbro & Mattel's Game?

Read MoreHide Full Article

The U.S. toy industry was taken by surprise when the country’s largest independent toy seller, Toys "R" Us filed for bankruptcy in September last year. The company recently confirmed that it is liquidating its entire U.S. operations (735 Toys "R" Us and Babies "R" Us stores). Liquidation sales started on Mar 23.

Toys "R" Us failed to keep up with fast changing customer preferences and shift of demand toward alternative entertainment modes like video games, MP3 players, tablets, smartphones and other electronic devices.

It simply could not compete on price and shopping convenience with giants like Amazonand Walmart. To make matters worse, the company was burdened with a $5 billion debt load, much of which originated from its 2005 deal to go private. All these developments gradually pushed it toward bankruptcy.

Will the Industry Suffer?

It will, certainly. With the last major chain fully dedicated to selling toys going out of business, we expect the industry to grow at a much slower pace for quite some time.

Big toymakers such as Mattel (MAT - Free Report) and Hasbro (HAS - Free Report) as well as smaller players like JAKKS Pacific (JAKK - Free Report) will be affected as a considerable portion of their revenues were generated from sales to Toys "R" Us. Retailers like Amazon (AMZN - Free Report) , Walmart (WMT - Free Report) and Target (TGT - Free Report) will surely come to their rescue, but the only problem is that they currently don’t have shelf spaces as big as Toys “R” Us.

Smaller players will be hit harder because, unlike Toys "R" Us, the existing retailers are likely to give preference to established brands in their limited shelf space. Further, Toys "R" Us’ exit will hurt innovation in the industry as it was the only major toy seller promoted new products.

Last year, the company sold, roughly one-fifth of the toys in the United States, generating more than $11 billion in revenues. According to Jefferies analyst Stephanie Wissink, while 85% to 90% of Toys "R" Us' volume would be redistributed by the second half of the year, there’s no surety about the remaining 10 to 15%. This portion of the purchase was incidental and may not shift to other channels.

A Death Blow to Hasbro?

Well, we hope not. Hasbro has been trying to curb its dependence on Toys “R” Us since the latter’s Chapter 11 filing. It has been testing waters with new distribution methods, developing digital play components and exploring ventures with other industries.

The company has diverse retail channels such as dollar stores, drug stores, and big mass market retail. It also has a robust online strategy in place that includes interactive content and virtual immersive experiences.

It has a five-year agreement with Paramount to enhance storytelling and content capabilities. The company also invested in Boulder Media, its animation studio, and increased digital capacities to drive sales.

Hasbro continues to release Transformers franchise products in all forms of entertainment, including movies, television and digital expressions. Given the company’s several innovative and productive plans for Transformers franchise over the next 10 years, revenues are expected to grow.

Moreover, the deal with Walt Disney to manufacture dolls based on Disney Princess stories and characters is expected to boost Hasbro’s top line.

We believe that with these initiatives in place, Hasbro is well positioned than others to witness incremental revenues, thus mitigating the impact of Toys "R" Us exit.

Last year, Hasbro generated 9% of its overall sales from Toys “R” Us and the latter has unpaid bills of $59 million with Hasbro.

Hasbro, Inc. Revenue (TTM)

What About Mattel?

Lack of innovative schemes for brand awareness and brand innovation have been hurting the company’s revenues and point of sale (POS) momentum and the Toys “R” Us bankruptcy has surely compounded its woes.

The company has been slow to react to deteriorating sales of its flagship product, Barbie and has hardly taken any measure to reduce reliance on U.S. sales. Mattel saw multiple CEO changes in recent years and lost Disney Princess and Frozen lines to Hasbro.

Mattel will be much worse hit than Hasbro as Toys “R” Us handled between 15% and 20% of the company's domestic sales, and 11% of sales globally. Moreover, Toys “R” Us owes more than $135 million to Mattel and chances of recovery are scant.

Mattel, Inc. Revenue (TTM)

Merger in the Cards?

Possibilities of a merger cannot be ignored. The impact of Toys “R” Us is strong enough to sustain speculations that Mattel may have to entertain a merger offer from Hasbro.

There also remains a strong probability of mergers and acquisitions of smaller toymakers as they are the ones to be more affected by the liquidation. Hasbro, being the world’s largest toymaker, is best positioned to go for an acquisition.

To Conclude

Hasbro has been one of the early movers to gauge the impacts of Toys “R” Us bankruptcy while Mattel was slow to react. Hasbro has been adapting rapidly to changing market conditions while Mattel has fallen behind. Though the bankruptcy has increased challenges for both companies, we expect that Hasbro’s counter strategies will help it come through unharmed.

On the other hand, Mattel is already in big trouble and only a well-planned strategic move (a turnaround or getting acquired) could shore up the company's flagging fortunes.

Zacks Rank

While Hasbro carries a Zacks Rank #3 (Hold), Mattel has a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Published in