Spin Master Earnings: Bloated Retailer Inventories Dislodge Results, but Relief Is on the Horizon

We don’t assign much weight to no-moat Spin Master’s TOY weak first quarter, which was hurt by inventory carryover stemming from 2022′s supply chain idiosyncrasies. This situation led to oversupply after an unexpectedly weak holiday season that brought outsize financial impact during its seasonally slow first quarter, echoing the woes of peers. Further, challenging comparable sales linked to movie-adjacent sales ate at results, snipping toy gross product sales by 47%. Outside of toys, Spin Master’s digital segment stabilized, with Toca Boca’s monthly active users down just 2%, but monetization efforts and new content should be a catalyst for growth. In total, with enterprise revenues off 36%, the firm experienced expense deleverage, with its adjusted EBITDA margin squeezed by over 1,000 basis points to 11.3%.

More positively, retailer inventory should be fully corrected by the end of the second quarter, with Spin Master claiming that two thirds of retailers are showing positive signs regarding replenishment. In fact, we suspect Spin Master boasts a superior retailer inventory position to its peers, as narrow-moat Hasbro detailed that carryover could spill into the third quarter and narrow-moat Mattel incurred obsolescence expenses. Additionally, although Spin Master’s 9% toy point-of-sale decline lagged the U.S. industry’s 5% fall, we posit this was due to peers’ intensive promotional tactics to help clear inventories at the expense of gross margin, while Spin Master’s gross margin expanded 250 basis points. We think market share gains should resume in the back half of 2023 thanks to a lineup of new licensing deals and entertainment offerings (Paw Patrol 2) that should also fuel adjacent sales.

The firm reiterated its fiscal 2023 outlook (flat to slightly down toy gross product sales and flat to slightly up adjusted EBITDA margin), which was in line with our estimates, and we see no reason to alter our CAD 50 fair value estimate materially, rendering shares as cheap.