Toy makers, like movie studios, rely on hits to drive up revenues. This becomes more important when the U.S. economy seems to be hibernating, which leads to cautious spending by consumers . As a result of faltering consumer confidence in the U.S., the two largest toy makers, Hasbro (HAS 0.32%) and Mattel (MAT -0.29%), will have to bank on emerging markets for their growth.
Hasbro on a roll
Hasbro delivered strong third-quarter results. The second-largest toy maker rallied to a new high as strong sales of toys marketed to girls offset weak demand for toys focused on boys. This helped Hasbro top third-quarter sales and earnings estimates.
The girls' category saw a year over year gain of 29%. This was partly offset by weak demand from the boys segment, which saw a decline of 17% despite decent performances from Transformers and Star Wars products. Hasbro posted revenue of $1.37 billion, which was 2% more than the year-ago quarter and beat consensus estimates of $1.34 billion.
Hasbro's weak performance in the U.S. and Canada was more than offset by strong growth in international markets. Strong gains of 11% in revenue in international markets were partly offset by a 5% year-over-year decline in the U.S. and Canada. Major gains came from Asia-Pacific with 17% growth and Latin America with 14% growth. Operating profit from international markets surged 24% year-over-year.
Better-than-expected top line growth due to strong performance in emerging markets, combined with operating margin expansion, resulted in Hasbro reporting earnings of $1.31 per share. This was better than the consensus estimate, and it was also higher than year-ago earnings per share of $1.24.
Toy makers in the U.S. are watching the developments ahead cautiously as a result of weak consumer confidence. Forecasts for November and December holiday season suggest sales growth of 2.4%, below last year's 3%, according to ShopperTrak estimates. This is because of faltering consumer confidence prior to the all-important holiday season.
The indicators from the third-quarter report suggest that sales from international regions can offset weak domestic demand heading into the holidays. Hasbro remains upbeat about the upcoming holiday season -- the busiest period for toy makers.
According to Hasbro's President and CEO Brian Goldner,
Our brand initiatives for holiday 2013 are resonating with consumers and retailers globally as we enter the all important fourth quarter. In addition to our innovative holiday launches, our expanded presence in faster growing geographies is delivering growth.
Hasbro has a strong relationship with Disney, and this should help the company going forward. It has already extended its deal for Marvel and Star Wars, an extension that gives Hasbro exclusive rights through the year 2020 to use these franchises for making toys. With a brand new Star Wars trilogy coming, Hasbro could enjoy more tailwinds. Needham & Co. analyst Sean McGowan is of the opinion that the boys category will turn around. Hasbro will be making toys for movies like Transformers and Spider-Man in 2014 and Star Wars the year after that .
Mattel going international as well
For Mattel, the largest toy maker in the U.S., better sales of American Girl, Barbie and Monster High helped it top third-quarter forecasts, raising management's expectations for the upcoming holiday period. Mattel said that retailers have been managing store inventories tightly as the holiday season approaches, but they are optimistic about the biggest time of year for toy makers – the holiday season.
"I am pleased with where we are, as we head into the holiday season," Mattel CEO Bryan Stockton said. "On the sales side, we grew revenue in every region of the world."
The better-than-expected third quarter results of Mattel were on the back of strong performance in different regions and segments. It posted an increase of 6.2% in revenue from last year to $2.2 billion, beating the consensus estimate by a margin of 2.3%.
Just like Hasbro, Mattel's performance in the international markets was far better than in the domestic market, which reflects the tough retail environment in the U.S. In addition, flat sales from the Fisher-Price brand are also a cause for concern.
With a higher top line offsetting higher cost of sales, Mattel's gross margin expanded 10 basis points to 53.8%, and its operating margin increased 40 basis points to 23.9%. As a result, Mattel earned $1.16 per share without considering the $0.05 per share tax benefit. This was 11.5% higher than the year-ago quarter's earnings of $1.04.
Mattel is looking to increase revenue further. That's the reason why it is exporting its American Girl brand. Mattel will open two in-store shops in Canada's largest book store chain -- Indigo Books & Music -- next year. Management believes that there is strong demand for the American Girl brand in Canada and there's good long-term growth opportunity in the country. Moreover, the company is willing to take this brand to more locations internationally.
Final words
Both Mattel and Hasbro are looking good for the future as they expand their presences globally. Hasbro's strong franchises such as Transformers and Star Wars and its tie up with Disney are positives. On the other hand, Mattel looks to take its American Girl brand, which accounts for 11% of its profit, global. As Mattel takes its brands to more countries, investors can expect more growth.
