The U.S. toy industry has been struggling with soft consumer demand and declining sales lately. Increasing demand for alternative modes of entertainment - including video games, MP3 players, tablets and smartphones - is marring profitability for traditional toymakers. Notably, demand for toys, previously preferred by kids aged three to nine years, has narrowed down to three to six years due to growing digital accessibility.
Subsequently, the United States' largest independent toy seller - Toys "R" Us - could not keep up with fast-changing customer preferences. It failed to compete with retail giants like Amazon AMZN and Walmart WMT on price and shopping convenience. The company was burdened with $5-billion debt.
All these factors led the toy seller to file for bankruptcy last year. Further, to add the final nail in the coffin, Toys "R" US started liquidating its U.S. operations (735 Toys "R" Us and Babies "R" Us stores) from March 2018.
Mattel, Inc. MAT and Hasbro, Inc. HAS are much affected by the industry setback as a considerable portion of their revenues were generated from sales to Toys "R" Us. With both the company carrying a Zacks Rank #3 (Hold), let us find out which is more affected and which still holds a chance to thrive.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Can Mattel Recover?
Mattel has been slightly slow to react to deteriorating sales of its flagship product, Barbie. It has hardly taken any measure to reduce reliance on the U.S. sales. Mattel witnessed appointments of multiple CEOs in recent years, and lost Disney Princess and Frozen lines to Hasbro. Moreover, Toys "R" Us used to take care of roughly 15-20% of Mattel's domestic sales, which needs to be revived by the company.
Subsequently, the Zacks Consensus Estimate predicts loss of 95 cents per share for the current year, while sales are estimated to fall 3.9% year over year. Mattel's net profit margin in the trailing 12 months is a negative 30.4% as compared with the industry's 5.6%. Moreover, a negative return on equity (ROE) of 56.6% compares unfavorably with the industry's 14.6%.
Mattel's suspension of its quarterly dividend of 15 cents per share, starting in the fourth quarter of 2017, did not go down well with investors. A look at Mattel's price trend revealed that the stock had an unimpressive run on the bourses in the past three months. Shares of the company have lost 4.7% against the industry 's collective increase of 0.1% 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 wait and see if the company can do better in the near term.
Does Hasbro Stand to Thrive?
Hasbro has been one of the early movers to gauge impacts of Toys "R" Us bankruptcy and subsequently has been trying to curb its dependence on the retailer. It has been focusing on varied product launches, partnerships and major theatrical releases to drive incremental sales. Shares of the company have also gained 18.1% over the past three months, outperforming the industry's rally.
However, despite testing waters with new distribution methods, development of digital-play components and exploration of ventures with other industries, Hasbro is still facing headwinds from Toys "R" Us liquidation. The consensus estimate predicts Hasbro's sales to fall 4.8% year over year for the current quarter. However, earnings are predicted to be $4.75 for the current year.
Meanwhile, Hasbro reinvests efficiently than peers as is reflected by its ROE of 35.3%. Net profit margin in the trailing 12 months is 4.2%. Hasbro also has a dividend yield of 2.4%.
Since Hasbro has been cautious of implications from Toys "R" US liquidation, it has crafted varied counter strategies to come out unscathed. The company is a clear winner, in terms of share price movement, profit margin, ROE and estimated earnings for the current year.
On the other hand, Mattel is already in troubled waters and only a well-planned move could shore up the company's flagging fortune.
Please take a look at the following table to compare these two toy makers.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Amazon.com, Inc. (AMZN): Free Stock Analysis Report Walmart Inc. (WMT): Free Stock Analysis Report Hasbro, Inc. (HAS): Free Stock Analysis Report Mattel, Inc. (MAT): Free Stock Analysis Report To read this article on Zacks.com click here.