It might be hard to believe, but it appears that the Grinch might actually steal the joy of the holiday season for the toy and game market. The fact that children will once again receive their presents this year is no reflection on the disarray in this once-strong industry.
The rise and fall of the toy industry has been as tear-producing as watching a Lifetime movie. We all grew up with Hasbro (NYSE:HAS) and Mattel (NYSE:MAT) toys and games and watched as Toys "R" Us (NYSE:TOY) aggressively forced every mom-and-pop toy store into early retirement with its critical-mass, chain-store concept. Now the tables have been turned, and Toys "R" Us is being pressured by retailers supreme Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST), as well as a slew of other retailers.
A snapshot of the toy and game industry's woes was on display when one of its top two companies, Hasbro, failed to meet expectations in its third-quarter results today. Hasbro's earnings were up 3.4%, but its profits were $0.45 per share, which were below last year's earnings of $0.48 per share and the analysts' consensus estimate of $0.51. Even more important was Hasbro's wide revenue shortfall; revenues declined 2% and were nearly 5% off expectations.
The source of Hasbro's difficulties appeared to be boy-based in the third quarter; the company's BEYBLADE line, which appears to be based on the old Battling Tops concept, produced a $65.3 million total revenue decline (including international operations). Margins also eroded in the U.S. toys segment, as its operating profit plummeted 55%.
Hasbro's disappointing third-quarter performance was intensified by management's belief that "it is increasingly unlikely that we will achieve our goal of revenue growth for 2004." The company added, "With the difficult revenue comparisons, a challenging retail environment and continued softness in the boys business -- it was clearly more difficult to grow revenues than anticipated."
Hasbro shares have dropped more than 5% today in response. The industry was already skating on thin ice, and it appears that the temperature just kicked up a few more degrees. Even though Hasbro has been using its excess cash to pay off debt, I would wait until the company and the industry gain some solid footing before jumping in.
Turn back the clock and play with these other takes:
Fool contributor Phil Wohl spent over 12 years on Wall Street and has never stopped being a toy lover. He does not own shares of any of the companies mentioned.
