Spin Master Heads Into Holidays With Clean Inventory, Helping Defend Margin Opportunity

With more than two decades since its inception, Spin Master TOY has developed and acquired a plethora of well-known brands like Paw Patrol and Hatchimals, amassing 2% share in a fragmented, more than $100 billion global toy industry (Circana). Utilizing a multifaceted plan for growth focusing on innovation in toys and digital games, higher penetration of overseas markets (which composed around 40% of 2022 sales), the pursuit of strategic acquisitions, and the development of evergreen global entertainment properties, we believe Spin Master has the ability to grow into nascent product and geographies. This, in turn, should help the firm near the pace the global toys and games industry is forecast to rise globally (at 6% between 2023 and 2027, per Euromonitor), including acquisitions and venture projects. Further, we posit now-completed supply chain optimization, with warehouses consolidated and sourcing better diversified, should support solid operating metrics (we forecast a low-teens average operating margin over the next decade). Spin Master is set to generate average free cash flow to equity of around $225 million over the next five years, facilitating investment in its operations while maintaining the flexibility to strategically add assets to its mix.

Despite its recent growth (with sales up 30% between 2017-22), we believe the firm has failed to amass an edge, warranting our no-moat rating. For one, given its low market share, we don’t believe Spin Master has the negotiating scale to warrant a cost advantage. Further, while it boasts modest brand recognition (assisted by acquisitions of well known brands like Gund) and has been able to sign key licensing arrangements, the finite length of these contracts could result in a fleeting revenue stream. Fast innovation and competition stemming from larger peers also temper our confidence in its ability to consistently grow its industry position. While we forecast returns on invested capital including goodwill (averaging 31% through fiscal 2023-32) to exceed our 9% weighted average cost of capital estimate, we attribute this to its asset-light model rather than a competitive edge.