The Toy Business Just Got a Whole Lot Less Happy

In this segment of the Motley Fool Money podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross, to talk Mattel (MAT -0.60%) and Hasbro (HAS 0.73%), which got hammered by the word around failing Toys R Us. It isn't the brick-and-mortar chain selling the most toys, but it's one of the top two or three, and the impact of its closure could do significant damage to those companies at the margins. What's next for the toy industry? The Fools ponder.

A full transcript follows the video.

This video was recorded on March 9, 2017.

Chris Hill: No fun this week for the toymakers. On Friday, shares of both Mattel and Hasbro were falling on the news that Toys R Us may be liquidating its U.S. operations sooner rather than later. Jason, I think we all know that Toys R Us was not in great financial shape to begin with, but this does not go in the plus column if you're Mattel or Hasbro.

Jason Moser: No. I feel like we've been talking about this for a while. We could have probably just gone in and said Toys R Us is liquidating about six months ago and put this story to bed. But with that said, I think it's important to note that life without Toys R Us can and will go on, but it's a much different market today in the toy market than the one we all grew up with. It's not going to be without its challenges.

When we look at Hasbro and Mattel, they are essentially in the same boat as to where they sell most of their stuff. Walmart (WMT 0.35%) accounts for around 20%, Toys R Us and Target (TGT 0.84%) about 9% each. So then you have to look at these two businesses and see which one is going to be able to deal with this shift better. And Hasbro is clearly the winner there. Mattel has been dealing with more receivables exposure on that Toys R Us side, and we've certainly seen the idea batted around more than once that maybe Hasbro and Mattel would merge at some point. I think Mattel is still dealing with a lot of cultural issues as well as some poor management decisions, and I think that's why you're seeing the market selling off Mattel more so than Hasbro. Either way, I think Hasbro is going to be fine, but still, challenges remain.

Matt Argersinger: Yeah, I don't think we can dismiss this as easily as we did roughly a year ago when Sports Authority was going out of business, liquidating, and we thought, "Well, it's only a small percentage of Under Armour's sales, so it shouldn't hurt them too bad." But what we saw was, at the margin, this actually hurt Under Armour pretty bad!

Hill: And it hurt Nike a little bit, too.

Ron Gross: It sure did.

Argersinger: Right. And I just feel like Toys R Us feels bigger in the space. And by the way, it does feel like kind of an end of an era here. I remember growing up, and Toys R Us was just the place.

Gross: The Legos, man.

Argersinger: And it's not there anymore. And I don't even know where you go to buy toys these days. I don't have a kid, so I don't know. But, I mean, going to Walmart and Target to buy toys doesn't feel the same.

Hill: I want to go back to something Ron had touched on. Ron, when you were talking about Costco and how they were able to maintain their margins, there are a lot of businesses out there that want to get their products into Costco, and Costco has a little bit more power when they're sitting down at the table to negotiate with any number of companies. Toys R Us is going away. If you're Walmart, if you're Target, your hand is strengthened a little bit here, and I kind of feel like, one of the winners in Toys R Us being liquidated is Walmart. Now, maybe, because of all of the shelf space they have, because of all their locations, don't they have a better negotiating position now with Mattel and Hasbro?

Gross: I would think yes, but then there's always Amazon who will be happy to take your business if Walmart plays too heavy of hand there. There's always that card you can play.

Argersinger: Ron hasn't gone one segment without mentioning Amazon. [laughs] It's, like, every single sentence.

Gross: And the next story we're going to do, I think we'll to talk about them again!

Argersinger: There you go!

Hill: Let's see if we can get through without mentioning the A-word.

Gross: Not happening.