What Toys 'R' Us Bankruptcy Means for Mattel, Hasbro
The narrow-moat toymakers have some time to find alternate channels to distribute their products and prevent future sales shortages that may stem from degradation of the Toys 'R' Us channel.
Leading toy retailer Toys 'R' Us filed for bankruptcy protection ahead of the holiday season, sending the shares of narrow-moat Mattel (MAT) and Hasbro (HAS) tumbling on uncertainty surrounding one of the companies' top distribution channels. Toys 'R' Us has received $3 billion in debtor-in-possession financing, which should cover the cost of goods demand over the duration of the holiday season; this lowers the near-term risk of a difficult holiday season for the toy distributors. However, we perceive incremental uncertainty longer term, as the filing provides liquidity but doesn’t offer a long-term strategy for the Toys 'R' Us business, which we suspect will include debt restructuring as well as store closures. With Toys 'R' Us stabilized for now, we think Mattel and Hasbro have some time to find alternate channels to distribute their products (through other vendors, e-commerce, or others) and prevent future sales shortages that may stem from degradation of the Toys 'R' Us channel. We plan to maintain our long-term outlooks and $28.50 and $98 fair value estimates for Mattel and Hasbro, respectively.
The top three retailers represent 39% and 36% of sales at Mattel and Hasbro, respectively, with around 10% allocated to Toys 'R' Us' 1,600 stores; this implies that about 90% of the distribution network remains intact. Sizable partners Target (with 1,800 stores) and Wal-Mart (with around 11,700 locations, representing 18% of Hasbro’s 2016 sales) remain stable players with plenty of financial flexibility to take on incremental product in the toy aisle, allaying immediate concerns about Mattel and Hasbro throughput. Target’s hardlines segment (which includes electronics, music, movies, books, sporting goods, and toys) represented about $12 billion in sales, nearly the same as Toys 'R' Us' $11.5 billion in sales in 2016.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.