As if shareholders of toy maker Mattel, Inc. (NASDAQ:MAT), along with those of its archrival Hasbro, Inc. (NASDAQ:HAS), weren’t in enough pain already, recent reports that Toys “R” Us would be shuttering all of its stores — for good — as it makes its way through bankruptcy proceedings dished out more pain.
Hasbro shares have fallen 10% since their late February high, while Mattel stock has slumped 20% since its January peak in the wake of news that the all-important retailer might be going away.
But is the toy-retailing venue really a make-or-break partner for Hasbro, Mattel and a bunch of other lesser-known toy companies? It’s not a minor matter, but in the grand scheme of things, the importance of Toys “R” Us may be a bit overstated.
Not the End of the World for Mattel Stock
On the off chance you didn’t know it, the short version of a long story is: Toys “R” Us is struggling — badly.
Yes, the “A” word has been deemed the culprit: Amazon.com, Inc. (NASDAQ:AMZN). With lower toy prices found online than in stores, in addition to a practically infinite selection that no single retailer could ever effectively offer, privately held Toys “R” Us has been slowly but surely wasting away.
Now it’s in dire financial straits, filing for Chapter 11 bankruptcy protection in September. It was hoping to keep some stores open as it reorganizes, but the latest (yet so far unconfirmed) word is that it’s going to close all of its units in the foreseeable future.
Considering it’s the big brick-and-mortar name in toy retailing, Hasbro and Mattel and all the rest are understandably worried. So are shareholders. How much of each company’s sales does Toys “R” Us drive anyway?
Not as much as you might think. In 2016, about 11% of Mattel’s revenue came from Toys “R” Us. The store chain meant even less to Hasbro, generating 9% of its business for that year.
It’s not chump change, to be sure. But it’s not exactly earth-shattering, either. And whatever it is, it’s arguably the least of the problems Mattel and Hasbro are facing at this time.
Missing the Boat
It’s cliche, but times are changing — so are kids and so are parents for that matter. In the past, toy makers weren’t competing with hundreds of television channels, a constant flow of new movies, immersive video-gaming experiences, licensing deals, never-ending enrichment activities, and of course, online competition.
For the most part, the top toy companies navigated these changes relatively well. It was a storm that left little room for error though, and time as well as a string of seemingly small mistakes have translated into some significant problems for the industry.
One of the key mistakes Mattel has made is not recognizing that girly dolls like its Barbie and American Girl lineups just don’t have the appeal they used to.
Though Barbie-branded toys have stabilized, they fell slightly again last year — to $955 million — and have stabilized at well below 2012’s annual revenue of nearly $1.3 billion. For the last quarter of last year, American Girl sales fell 23%, unable to capitalize on the robust growth in holiday spending.
The girl-centric lines don’t reflect modern-day values regarding gender, but Mattel hasn’t come up with much to offset the deteriorating lines.
Mattel has also, arguably, become too reliant on licensing deals.
They’re a two-edged sword, to be sure. Adding the words “Star Wars” or “Frozen” to the package can make a toy much easier to sell, but when margins are already thin, royalty payments can take a big bite out of profits.
And, licensing has become a competitive market in and of itself. In 2015, Mattel sacrificed an estimated half-a-billion dollars in revenue by losing Disney’s “Frozen” license to Hasbro.
It’s just the nature of the current market environment. But it could have at least been abated were Mattel able to create or cultivate more home-grown brands — kind of like the way Hasbro turned Transformers into a franchise in the ’80s after buying the rights from a mostly unknown company called Takara.
Then of course there’s the revolving door at Mattel’s executive offices.
Current CEO Margo Georgiadis replaced Chris Sinclair early last year, who was only at the helm for two years. Just a few months later, CFO Kevin Farr — who had been in the position for 17 years — was shown the door. And just last month, Chief Brands Officer Juliana Chugg stepped down so Georgiadis could take a more active role in brand management.
It’s simply an awful lot of change in a short period of time.
Bottom Line for Mattel Stock
Don’t misread the message. If Toys “R” Us goes away, Hasbro will notice, and Mattel will notice even more.
It’s misguided to think that’s the overarching concern MAT and investors in Mattel stock should focus on here, however. Even if Toys “R” Us was thriving, off-target products and a lack of innovation were likely to extend a three-year streak of waning revenue.
Rather than fret the impending absence of a key partner, shareholders of Mattel stock may want to think about putting a Board of Directors in place that can steer the company in a more marketable, profitable direction.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.