What the Toys R Us Closing Means for Mattel, Hasbro
The retailer's liquidation doesn't change our long-term thesis or narrow moat rating for either toymaker.
Toys 'R' Us, or TRU, recently announced its liquidation in the U.S., and we’ve taken steps to adjust our 2018 top- and bottom-line estimates for Mattel (MAT) and Hasbro (HAS). While the closure of a major partner is unfavorable, we don’t believe this change impacts our long-term thesis or narrow moat ratings for either Mattel or Hasbro, given the decreasing reliance each has had on this channel since the retailer’s Chapter 11 filing in September (representing a high-single-digit percent of sales in fiscal 2017 which we surmise this fell to the mid-single digits over the course of the year). As such, we anticipate the toy marketers’ brand intangible assets will remain intact.
Furthermore, we’re reducing our Hasbro fair value estimate by $3, to $97, as we now expect first-half sales could fall around 4% in response to a TRU liquidation (versus a low-single-digit increase expected previously) and incorporate the incremental hit to gross margin, SD&A, and advertising we think will prove necessary (taking operating margins down 100 basis points year over year to 8.8% during the half). For Mattel, we had already modeled modest sales declines (down 1%) over the first half of fiscal 2018, and our updated outlook includes sales that fall by a mid-single-digit clip. Corresponding expense deleverage in gross margin, advertising, and S&A also weighs on performance (taking first-half operating margin to negative 12% from negative 9.5% last year), knocking $1.00 off of our fair value estimate, now at $21.50. We anticipate Mattel and Hasbro could be through the worst part of TRU’s wind down by the third quarter, when we expect more normalized (very low-single digit) demand to resume. While shares of both strike us as undervalued, we believe near-term headline risk surrounding the TRU potential liquidation could continue to weigh on shares over the next several months.
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 shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.