Play Time Curbed in Toy Land

 | Jul 18, 2013 | 10:00 AM EDT
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Toy maker Mattel (MAT) announced on Wednesday a disappointing second quarter. Management placed the blame squarely on Barbie. She in turn got all moody and won't talk to anyone.

Then, after the close, JAKKS Pacific (JAKK) reported a second quarter that was so far below expectations analysts thought the company misplaced a decimal. JAKKS reported a loss of $2.14 a share vs. analysts expectations of $0.04. Obviously, something went horribly wrong last quarter.  Hasbro (HAS) reports  next week and investors aren't waiting around for the bad news. The stock fell 2.4% Wednesday.

Investors in the toy business were totally brutalized Wednesday. First, Mattel missed by $0.11 and JAKKS reported sales significantly below expectations. Mattel's revenue rose just 0.9% to $1.17 billion. Analysts had expected $1.22 billion in revenue. Gross margins were flat, but selling, general and administrative expense jumped a staggering 320 basis points. The company also jacked up its share repurchase program by $500 million in order to smooth any hurt feelings.

Global sales of Barbie fell 12%, marking the fourth straight quarter of declines for the brand. It wasn't all bad. Christmas came early for the rest of the girl brands. Sales of American Girl rose 14% and the company's other girl brands, such as Monster High did manage a 23% increase. Fisher-Price and Hot Wheels reported declines of 3% and 1%, respectively.

Just when investors were about to write the second quarter off as simply a problem related to weak Barbie sales, JAKKS Pacific reported a downright scary quarter. The company said its Monsuno and Winx Club toy lines failed to sell. Sales were so bad, retailers aggressively marked down the remaining inventory. Revenues fell 26.9% to $106.2 million vs. the consensus expectation of $147 million.

The company immediately cut fiscal 2013 guidance. Management is now forecasting sales of approximately $620 million vs. the previous expectations of $693 million. Besides blaming the cooler-than-normal weather, management believes kids are shifting their play habits towards electronic toys. That change is hurting companies like JAKKS.  The board of directors suspended the dividend until the company can return to profitability. That news sent the stock down over 21%.

Look, the second quarter in the toy business is meaningless. For Mattel, the second quarter is just 18% of total revenue.  It's a transition quarter. Next quarter sales begin to pick up as retailers start to place their orders for the holidays. Hasbro is expected to report July 21 and it will be interesting to see if they can make the quarter, or if consumers have put off new toy purchases. Analysts expect Hasbro to report revenue of $794.71 million and earnings per share of $0.34.

Right now, I do not want to play with the toy sector.



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