Source: Mattel

If you are seeing more kids playing with tablets instead of toys, you aren't alone. The concerns over the potential demise of the toy industry are overblown, however. This suggests that profitable investment opportunities can be found with toy companies like Hasbro (HAS -0.38%), Mattel (MAT 0.45%), and JAKKS Pacific (JAKK -1.20%).

What I buy
Notwithstanding the increasing popularity of tablets and mobile games, Euromonitor forecasts that the global toy industry will grow approximately 6% from 2012 to 2017. Among the different geographical regions, Latin America will be the highest growth region touting an annual growth rate of 11%, while North America is expected to see industry revenues increase at a decent 3% every year. The stable forecast for U.S. growth supports the argument that kids are migrating from computer and console games to their mobile counterparts, but aren't necessarily giving up on toys altogether. According to Mattel, data shows that kids' playing time with toys have remained stable at 30 minutes per day for the past three years.


Source: JAKKS Pacific

While toys still remain relevant to child's play, there's no harm in bridging the online-offline gap with innovative products. In November 2013, JAKKS Pacific introduced its miWorld toy line that allows kids to build and play with the miniatures of real-life stores and mall spots. More importantly, kids can use the free miWorld app to create avatars, play mini games, and interact with each store that they build.

Where you sell
The optimistic outlook of the global toy industry is supported by positive demographics. From 2013 to 2017, 400 million new births are expected globally, adding significantly to the pool of new customers for the toy companies. As expected, emerging countries will account for much of the growth opportunities in the toy industry. For example, the per capita spending on toys and games in the U.S. is about three and eight times that of such expenditures in Brazil and China, respectively.

Examining the financial track records of the three toy companies reveals a similar trend. Both Mattel and Hasbro derive close to half of their revenues outside the U.S., while JAKKS Pacific generated approximately one-fifth of its sales from its international business in 2012. As a result, Mattel and Hasbro have performed relatively better than JAKKS Pacific because of their larger foreign exposure. Mattel has grown its revenues by a five CAGR of 1.9% from 2009 to 2013, while Hasbro's top line has remained relatively constant at $4 billion. In contrast, JAKKS Pacific has seen its sales fall by 26% from its 2008 peak revenues of $900 million.

Where I buy
The digital revolution isn't just affecting what kids are buying (toys versus digital products) but also where they are buying their favorite toys. There has been a shift in market share from brick & mortar retailers to their online counterparts. According to ShopperTrak, while consumer spending at brick & mortar rose by 3% year-over-year during the 2013 holiday season, foot traffic fell by 15% in 2013 as compared to 2012.

Toy companies need to be where their customers at, with respect to their distribution channels. Back to the relative revenue performance of the three toy companies in recent years, Mattel has stood out among its peers, expanding its revenues by a three year CAGR of 3.5%, while Hasbro and JAKKS Pacific have seen their sales stagnate and even decrease. Mattel claims at its February 2013 Analyst Day that it has spread its bets among both online and offline retailers very early on, which explains why it has been relatively unaffected by the rise of the online retailers.

Consumers aren't just buying toys online, they are also researching on their potential purchases online. Hasbro acknowledged at its September 2013 Investor Day that it didn't invest sufficiently in branding experiences online in the past. As a result, Hasbro rolled out a program called Digital Access Delivery to ensure that instructional videos and product reviews are readily available online to assist customers in making the right buying decisions. Similarly, Mattel makes sure that it expands its customer touchpoints online through mobile apps, social media, and websites.

Foolish final thoughts
While toys aren't going to disappear from child's play anytime soon, toy companies have expanded their operations overseas where the demand is stronger and increased their digital presence. Of the three toy companies, Mattel scores well on both counts, which has been reflected in its superior financial performance in recent years.