Lego, everyone's favorite privately owned Danish toy company, reported fantastic growth in its 2015 annual results last week, breaking several of its own records.
In this clip from Industry Focus: Consumer Goods, Sean O'Reilly and Vincent Shen talk through the numbers, how they compare to the rest of the toy industry, and where the company is looking to grow in the future. The team also discusses how the popularity of mobile phones and video games has put serious pressure on the toy industry, and how Lego is performing spectacularly in spite of it.
A transcript follows the video.
This podcast was recorded on March 1, 2016.
Sean O'Reilly: Lego is building itself into the largest toy company. Did you read that article I wrote about investing on my son's behalf for the next 16 years? I joked at the end how I wished I could buy shares in Lego, so this is really funny.
Vincent Shen: Yes.
O'Reilly: And there's a reason. I would kill to own this company. Go ahead.
Shen: So, here's another one that ties into recent episodes where we covered Disney (NYSE: DIS) and Star Wars, for example, and other toy companies. So, Lego, privately held, but still a really amazing business, incredible brand power. They report annual results, since they're privately held.
And they enjoyed an amazing 2015, where revenue increased 25% to 35.8 billion Danish krone, which is about $5.2 billion. Their net profit rose 31% to about $1.3 billion. They enjoyed double-digit sales growth at pretty much all of their markets. And that, you have to keep in mind, is far outpacing most countries where they're seeing industry growth at maybe mid-single digits. And a lot of "most evers" for the company this year. They launched 350 new products in 2015, most ever for the company. They moved about 72 billion bricks and 725 million mini-figures during the year.
O'Reilly: That's a lot of plastic.
Shen: And 100 million children interacted with the company through its toys and other initiatives. Interestingly enough, the best sellers for the year for the company were actually a castle from Frozen, Elsa's Frozen Castle. And No. 2, which I thought would be No. 1, was the awesome Millennium Falcon from Star Wars.
Shen: And so, Lego, very quickly building up to potentially be the largest toy company in the world by revenue. That title is currently held by Mattel (NASDAQ:MAT). As I mentioned, Lego logged $5.2 billion in revenue for 2015, Mattel had $5.7 billion. And the thing is, their trajectories are very different. Lego's been in a great growth path, Mattel's been on an opposite one. But the effects of that are a little different.
They were grappling with the falling popularity of some of their bigger brands like American Girls and Barbie, and they've also been hit really hard by some of the currency fluctuations and strength of the U.S. dollar, obviously. But they only had $540 million in operating income. Compare that to Lego, which had net profits of $1.3 billion. And Lego's been well-known as being the most profitable toy company in the world.
Shen: So, Mattel has seen a turnaround in some of their other brands, but they're anticipating a pretty tough 2016 because they lost the Disney princess licensing deal. And overall, for Lego at least, looking ahead, the CFO, John Goodwin, he noted that, for this year, they're going to really focus on markets in Latin America and in Asia. It's really crazy, because China, they think is the tip of the iceberg for them, but they saw 35% growth in that market last year.
Shen: And then, an issue that they had, with such incredible success on the back of Star Wars and ...
O'Reilly: And The Lego Movie and all that stuff.
Shen: ... Frozen and The Lego Movie and all this, was, they're having a hard time, honestly, keeping up with demand. They encountered some operational difficulties, especially during the holiday season. So the company, in another of their "most evers," poured about $410 million into their manufacturing facilities in 2015, with expansions in China and their other facilities. It's the most they've ever spent in their company history. And, they've also increased their workforce 20% during the year.
Shen: And then, long-term, the company has had an incredible run. They've had a decade of 15% annual growth. So, management is, I guess, trying to temper expectations a bit, saying, "This isn't going to be sustainable forever." But they're expecting a really strong 2016, again with double-digit growth. And they managed to quadruple sales in the past decade, which has otherwise been a period that's hurt a lot of the other toy companies, because you've got mobile devices, electronics, taking a lot of mind share and market share away from traditional toys. I think Lego's going to be riding some of these trends pretty well, because they had the really successful 2014 Lego Movie, they have some games coming out, more on the electronics video games side, to build up on.
O'Reilly: Now, I've got multiple, fairly large tubs in my parents' basement, from when I was a kid, full of Legos. It was kind of a big deal then, and what it's become, and the pandemonium that you see ... I took my two-year-old to the Lego store at Tysons Corner Mall, and I was worried about his safety, because he's smaller than all the other kids, and we were trying to navigate through here, and it was just like ...
Shen: Well, it's funny you mention that, I was home last weekend at my childhood home ...
O'Reilly: Did you build your old Legos, Vince?
Shen: ... and I had to do a lot of cleaning up around the house and garage, and I found so many of our old Legos.
O'Reilly: You wanted to sit down, say it.
Shen: It is definitely a brand, and a toy, that, despite its simplicity and how popular it's been, it's not seeing any decrease.
Shen: Kids still love it, even with all the electronics and other competition that seems to be taking away from the traditional toy segment.
Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.