Every end-of-the year holiday season — beyond the celebrations, the gift giving and the get-togethers with friends and families — includes some retail drama. Behind even the frenzied buying and the manic shoppers who fill the stores, retailers are focused on selling and winning.
Toy companies are no different.
The two major toy companies, Mattel, Inc. (MAT) and Hasbro, Inc. (HAS), are in their usual holiday smackdown. This year, though, Hasbro stock looks like the prohibitive favorite.
Why? They’ve got more of the toys kids want, and they’re on a roll.
Mattel stock and Hasbro stock have ultimately reflected this.
Mattel Stock’s Slump
It would seem this year would be a good one for toymakers — Hasbro stock has gone up smartly in 2014, However, Mattel stock has sagged from just under $48 at the end of last year to just over $30 a share, reflecting sales difficulties in its ongoing battle with Hasbro.
Sales declined for Mattel in the last four quarters, as the most recent quarter continued that trend. Sales of Barbie dolls were off 21% in the third quarter compared to last year’s same quarter. In October, Mattel reported total third quarter revenue down 8% to $2.02 billion from 3Q the previous year, with adjusted earnings off by 15% at 98 cents a share.
Hasbro Toys Hot, Mattel’s Not
The main reason Hasbro stock has outperformed Mattel stock is that both reflect the product line of their businesses. Simply put, Hasbro has had the more popular toys, the ones kids want to buy and play with.
Dinobots and Avengers are trending. Barbie is not.
As we enter the critical holiday showdown season for both companies, that doesn’t look like it will change soon, either. And the kids ultimately have the say in what goes in the toy biz.
Of course, it doesn’t look like a fair fight, does it — a Transformer dinobot against a doll? OK, OK, we’re talking about business here. No disrespect to classic Barbie, but she’s older and not as spry a seller. Mattel is getting help, though, from the princess tag team Elsa and Anna of the wildly popular Frozen movie.
However, even with Elsa and Anna in Mattel’s toy lineup, observers feel Hasbro will handily win the holiday battle.
Mattel’s Problem
To his credit, Mattel CEO Bryan Stockton realizes the problem. Mattel’s toy line lags behind Hasbro’s in part because its older franchises, Barbie and Fisher-Price, have lost some luster.
Though toys aren’t strictly gender-divided anymore, Mattel traditionally has featured a strong line-up of toys for girls, with its American Girl and the recently added Frozen along with the iconic Barbie, while Hasbro’s action toys and its line appeal more to boys.
A big problem, though, is that Mattel’s major asset — its licensing deal with Walt Disney Co (DIS) for the Frozen dolls — runs out after 2015, when Hasbro takes over. Mattel will lose out on as much as $300 million in revenue.
So what can Mattel do?
Mattel has no doubt watched closely what Hasbro has done. Hasbro has strong licensing agreements for its Transformers characters and Disney’s Marvel superheroes. Thus, Mattel needs to compete hard for more partnerships to replace its Frozen tie-in.
Mattel also should note what’s working for it already, which are its newer doll lines more than the refreshed legacy Barbie line. Plus, Mattel needs to develop vigorously more toys like its still successful Hot Wheels and Matchbox toys.
E-Toys, Tech Toys, the Next Step
Another avenue in toy retailing that has to be explored is electronic devices and toys. This ultimately will be more of an industrywide development than something that’s an issue solely for Mattel or Hasbro. Sales of certain types of traditional toys have fallen across broad categories. Games and puzzles, along with action figures, are having to fight off the sales inroads by digital games, smartphones and tablets to children.
The toy world is undergoing rapid change as technology asserts its dramatic influence. The landscape for tech toys is fragmented now, and the future e-toy world is unclear, but Mattel should be looking to be there eventually in a big way — as should Hasbro, for that matter.
For right now, Mattel stock would need a fundamental turnaround before it’s a buy. It does pay out a nearly 5% dividend, which could reward investors while they wait, but without evidence that it’s making the moves to head in the right direction, new money would be better spent elsewhere.
Hasbro stock still has plenty of life right now, but even after a 5% drop from all-time highs this month, it still might be worth waiting for a lower entry point.
As of this writing, Greg Sushinsky was long DIS.
