It's not recalls that's derailing the maker of the Thomas & Friends line of toys; rather, a withering retail climate has RC2 (NASDAQ:RCRC) running off the rails. Add in a lost opportunity because of the frozen credit markets and you have a picture book of the little engine that couldn't.
Revenues dropped 8%, while net income in the quarter rose 2.7% from the year-ago period. However, after stripping out one-time items related to the recalls that hit earnings to the tune of $0.28 a share last year, there's a whole other story to be told. Adjusted for non-recurring items, EPS dropped 17.5%.
While toy manufacturing giants Mattel (NYSE:MAT) and Hasbro (NYSE:HAS) were able to expand their profits marginally, they haven't exactly been chugging along, either.
Yet such weakness still underscores the difficult environment RC2 finds itself in. Retailers are cutting back the amount of toys they're ordering right now -- typically this would have been the time of year toymakers would find shipments rising -- but RC2 also has the added burden of having much less shelf space at Wal-Mart (NYSE:WMT) than it did previously: its toys are only in a few hundred of the discount retailer's massive 3,000-plus store network. While RC2 is working hard to regain that distribution avenue, it makes for a tough sell in the meantime.
During the quarter, sales fell across its product lines. While the rate of decline in its mother, infant, and toddler segment slowed from previous quarters, the preschool, youth, and adult category dropped 9% on a comparable basis. That's gotta hurt more, since it was in this area that the failed Children's Publishing acquisition would have fit had it not been for the frozen credit markets. While there's always the chance the deal could be revisited when conditions improve, we may just have to expect less from the toymaker here.
The playroom isn't completely barren, though; there are opportunities for RC2 to improve. Costs -- oil and zinc prices -- have fallen for the toymaker. That will help in manufacturing its John Deere (NYSE:DE) line of toys, for example, which, along with Thomas, accounted for more than 10% of sales last year, but the company is still feeling pressure from rising costs in China, where most of its toys are made. Moreover, other niche toymakers like JAKKS Pacific (NASDAQ:JAKK) have been able to grow sales, if not profits, in a meaningful way.
Unfortunately, RC2 hasn't recovered from the nasty spill it took as a result of last year's recalls and has had to face the storm of recession and lack of credit from a weakened state. At about 7 times this year's expected earnings, the market has corrected the toymaker's price to a more reasonable level that seems to have priced in most of the difficulties it faces in making the grade.
While the track RC2 has laid down over the past few quarters has caused the stock to derail, any improvement in the economy ought to help the Thomas & Friends maker get a full head of steam.
