Glick Johnson, Independent toy and leisure product specialist
News from publicly traded toy companies has improved during the second-quarter earnings season, with stronger confidence in 2024 than we heard earlier this year. Still, there’s caution heading into season three. Hasbro ( HAS ) still expects the industry’s sales to decline by mid-single digits this year, while Mattel ( MAT ) also expects “modest” declines. The concern I hear most often from publicly traded toy companies is the impact of the economy on consumer spending and the shift in consumer spending toward experiences and services.
Public investors have been skeptical about toy companies’ stability through 2024 and growth into 2025, as evidenced by the discount toy stock valuation multiples compared to historical data and the overall market. The average price-to-earnings (P/E) ratio of publicly traded toy companies is 12.3 times 2024 earnings per share (EPS) forecasts and 12.1 times 2025 earnings per share (EPS) forecasts. That’s a significant discount to the S&P 500, which trades at 22.6 times 2024 EPS estimates and 20 times 2025 EPS estimates. Historically, toy stocks have traded at about 15 times forward earnings per share. By valuing these companies at a discount, investors are betting that profit expectations are too high and need to be revised downwards.
Yes, it’s a challenging economy. But aren’t toys defensive? Yes, the transformation in experience is real. But why are experiences more attractive than toys? I think the answer is a general lack of compelling innovation. When I walk down the toy aisle or surf the Internet, I see almost nothing that excites or interests me.
Poor performance can easily be blamed on the economy. Few would question the challenges consumers face, but I’m told toys are the last thing in a household budget that can’t be cut. I remember a time when a bad economy meant investors would buy toy stocks because they were defensive rather than selling them because they were discretionary. Investors clearly don’t feel that way anymore, with five North American toy stocks – Funko, Hasbro, JAKKS Pacific, Mattel and Spin Master – down an average of -21% over the past two years (compared to average annual decline of +39%).
But if we look back at history, the toy industry has performed well despite the economic downturn. In 1982, U.S. GDP compressed -1.8% (Bureau of Economic Analysis) and inflation was +6.2% (Bureau of Labor Statistics). However, the toy industry grew by about 20% (according to some old NPD/TRST data I have in my collection). There were some great innovations at the time. He-Man was launched in 1981 and became popular a year later (toy timeChristopher Byrne, 2013). Released in 1982, Trivial Pursuit brought something new to gaming for people of all ages.
In 1983, as the United States emerged from recession, the toy industry grew by 15%, with more innovative products such as Care Bears, Rainbow Brite and, of course, Cabbage Patch Kids. Each Cabbage Patch Kid is unique and easy to adopt – a truly innovative concept.
During the 1991 recession, GDP shrank by -0.1% and inflation was +4.2%. However, the toy industry grew by 15% (and by 12% in 1992). I give credit to POGs (Pig Game Reimagined) and the introduction of Larami Corp.’s Super Soaker, which was a huge leap forward in the water gun world.
What about the global financial crisis of 2009? At that time, GDP compressed -2.6%. While the toy industry shrank -0.5%, that was much better than other consumer discretionary categories. Spin Master’s Bakugan exploded onto the scene in 2008, and the brand saw sales grow in 2009 thanks to some of the best engineering we’ve seen in a toy since Transformers debuted in 1984.
We all know that great innovation can help grow an entire industry by creating buzz and excitement while generating multiple visits and clicks to your store. But I haven’t seen much of it over the past few years. What about this year? I’m still waiting to be stimulated. I’m not overly impressed by what I’ve seen so far. Street Shark and the return of Moana? Squishmallow as a miniature collectible? Fisher-Price wooden toys? More Transformers, Minions and Ninja Turtles? Of course, I haven’t seen everything listed yet, so there’s still hope for the holidays.
Why is toy innovation scarce? I have two guesses. The first is the COVID-19 pandemic. Working from home is not ideal for toy development, and I believe we are already seeing the results of the innovation gap spilling over into the retail channel.
Then I wondered if Toys “R” Us’ bankrupt chicken had reaped the consequences. Six years ago, America’s only large-scale dedicated toy retailer cleaned out its entire store. At the time, I wrote that the industry would suffer, especially in areas of innovation. Toys R Us has an extensive product line spanning multiple categories, allowing the toy company to try out new ideas. The current retail model is not conducive to new, fresh ideas.
Maybe these are just good excuses and the toy industry has lost its innovative spirit. I can’t say I’ve found the answer, but I know the toy industry is resilient and filled with many smart entrepreneurs. The industry has overcome many challenges in the past and I believe it will regain its vigor. When that happens, hopefully investors will be inspired by new concepts and ideas; take another look at toy stocks; and recognize their defensive characteristics, cheap valuations, and growth potential. This should lead to multiple expansions and share price appreciation.
A version of this feature was originally published in The Toy Book’s 2024 Los Angeles Fall Toy Preview issue. Click here to read the full article! Want to receive a printed copy of The Toy Book? Click here to view subscription options!
