The NPD Group has revealed that toy industry sales grew 9% in the first half of this year in the 12 global markets it tracked. In fact, the US experienced the highest growth of 16% among the countries tracked, with kids stuck at home driving higher demand.
However, the second-quarter results of Hasbro and Mattel did not reflect the broader industry’s strength as both the leading toy makers suffered due to temporary closure of stores and production issues.
Using the TipRanks’ Stock Comparison tool, we will analyze these two toy companies and see which stock offers a more compelling investment opportunity.
Hasbro, which owns popular brands like Monopoly and Jenga, lagged the Street’s expectations in the second quarter. Despite the strong demand for categories like gaming (robust demand for Jenga, Connect 4, Battleship, Mousetrap and Twister) and brands like Play-Doh and Nerf, the company’s revenue declined 29% to $860 million. Retail store closures and supply chain disruptions dragged down the company’s top line.
Meanwhile, strength in the online channel during the pandemic reflected in the quarter’s e-commerce sales, which accounted for 30% of the company’s toy and gaming revenue.
Excluding the impact of the eOne [or Entertainment One] acquisition and other one-time items, the second-quarter adjusted EPS declined to $0.02 compared to $0.54 in the second quarter of 2019. Hasbro’s acquisition of Canada-based eOne last year added popular franchises like Peppa Pig and PJ Masks to its portfolio and a rich content library of movies, TV shows and music tracks.
Hasbro expects to recover in the third quarter as retail stores have started reopening and supply issues have largely been addressed with nearly all the partner factories and warehouses currently operating.
And looking forward, Hasbro is geared up for the holiday season with new launches for brands with good momentum in gaming and Nerf, and for product lines related to Disney’s Frozen 2 and Lucasfilms Star Wars. However, the company expects weakness in its Latin American business to continue in the second half of the year.
At the same time, the company expects its entertainment and licensing business to recover as production has been resumed and is optimistic about a strong 2021. Hasbro has been transforming its business beyond toys and is focusing on the growth opportunities in the entertainment and licensing areas. Notably, eOne is developing over 100 films and 60 new TV projects. (See HAS stock analysis on TipRanks)
Following earnings, BMO Capital analyst Gerrick Johnson lowered the price target for Hasbro stock to $69 from $76 and maintained his Hold rating. The analyst believes that management's outlook for a "good" second half of 2020 looked "less confident than normal". He also warned about the variability in the company's eOne results for the next several quarters.
The Street’s Moderate Buy consensus for Hasbro is based on 5 Buys, 4 Holds and no Sell rating. The stock has declined over 23% year-to-date- while the 12-month average analyst price target of $85.44 reflects upside potential of just 5.6%.
Mattel exceeded analysts’ expectations for the second quarter but revenue and earnings declined due to the pandemic. However, Mattel fared better than Hasbro on the impact of COVID-19 related issues, as reflected in the revenue growth rate.
Mattel’s sales dropped 14.9% Y/Y to $732 million as higher sales of Barbie and games, particularly in North America, were not enough to offset the weakness in other categories. Retail closures at the beginning of the quarter and distribution challenges hurt the company’s performance.
Also, the quarter faced difficult comparisons with last year, which saw higher sales of toys related to the Toy Story 4 movie. Mattel posted an adjusted loss per share of $0.26 compared to a loss per share of $0.25 in the second quarter of 2019. Despite pressure on the top-line, Mattel’s gross margin expanded 410 basis points due to cost savings and a decrease in royalty expense.
Meanwhile, e-commerce sales gained in every region in the quarter. Especially, in North America, e-commerce sales doubled and accounted for about one-third of the total volume. (See MAT stock analysis on TipRanks)
Based on the momentum that the company is seeing, Mattel expects improved performance in the second half, which includes the crucial holiday season. But the company cautioned that the COVID-19 uncertainty and its impact on retail store closures in key international markets will likely hurt the results in the second half.
Mattel has been transforming itself into an IP (intellectual property)-driven toy company. The company is leveraging its strong brands and has entered into key partnerships to make movies and TV series. Mattel Films now has nine movie projects in development and recently released new content related to Barbie, Thomas and Polly Pocket.
On the back of MAT's earning results, MKM Partners analyst Eric Handler increased his price target for Mattel to $13 from $9 while maintaining a Neutral rating. He cited the second-quarter earnings beat as the impact of COVID-19 was "not as bad as feared".
Based on 2 Buys, 1 Hold and 1 Sell, Mattel has a Moderate Buy rating. Mattel stock has plunged 17.5% so far in 2020. There could be a possible upside of 14.7% over the next 12 months based on the average analyst price target of $12.83.
Bottom line
Both Mattel and Hasbro are likely to recover with the reopening of retail stores. Currently, 55% of analysts covering Hasbro have a Buy rating compared to 50% in the case of Mattel.
But amid this current crisis, one major favorable aspect of Hasbro is that it pays dividends and has a high dividend yield of 3.4% while Mattel does not pay any dividends currently (it suspended dividends in 2017).
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
