Spin Master Earnings: Season Scrooged Ahead of Holidays; Melissa & Doug Tie-Up Preserves 2024 Growth

No-moat Spin Master TOY failed to escape the recent spending weakness that has plagued the consumer discretionary landscape, revising its gross product sales, or GPS, outlook to decline at a high-single-digit rate from flat to slightly down prior. This implies fourth-quarter GPS that still rise at a high-teens clip, significantly better than our other narrow-moat company forecasts, which include a high-teens decline at Hasbro’s consumer product segment and low-double-digit increase in GPS at Mattel. We expect to reduce our CAD 50 fair value estimate in response to a weaker near-term outlook for GPS that we believe will persist into 2024. However, the full decline will be partially offset by the addition of Melissa & Doug in our model. We have added roughly $450 million in projected 2024 sales from Melissa & Doug to our estimate, below the $490 million the brand captured in 2022 to account for the slowdown seen broadly across toy categories. As such, we plan to adjust our intrinsic value lower by around $3 but still view shares as significantly undervalued.

Spin Master’s third-quarter performance was solid, with total GPS up 14% with all three creative segments capturing growth. Toy GPS rose a strong 10%, but entertainment impressed, rising 71% thanks to Paw Patrol’s movie release, a factor we think will be a key to growth over the next few quarters given the upcoming recognition of the direct-to-consumer release and ongoing inbound license flows. Furthermore, digital appears to have found its return to growth in consumers, which drove segment sales 31% higher—monthly average users on Toca Life World rose 12%, while Sago Mini (which represents the most digital users) and Originator contracted at just a low-single-digit rate. Adjusted EBITDA margin rose 620 basis points, to 33.1%, although we concede some of this was attributable to the mix of sales (with entertainment strong) rather than structural changes in the business.