How Toy Stocks Test Investors

To borrow from the beloved TV rerun of “Rudolph the Red-Nosed Reindeer,” some stocks in that sector known as Toyland — even with Black Friday nigh — are teetering on a trip to the Island of Misfit Toys.

Just take a look at Hasbro (ticker: HAS), which since Sept. 19 and Halloween fell a sickening 16 percent, just in time for the holiday shopping stampede. Prior to that, it had been on a rally, up 30 percent between April and September. And then? A 30 cents-a-share earnings miss on a 7 percent decline in revenues in its latest quarterly report.

So what happened to send Hasbro back to Santa’s workshop for badly needed repair?

Toys R Us, that’s what.

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After shuttering all its stores at the end of June — and there were more than 700 when the retailer announced plans to go out of business in March — Toys R Us created a vacuum far bigger than its now empty airplane hangar-sized locations. And that giant sucking sound you hear today is toy and board game stocks sweating the prospect of life after Geoffrey the Giraffe and his retail empire.

“The bankruptcy of Toys R Us makes it more difficult for toy retailers to sell their products,” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “Toys R Us was a large and steady product buyer and the loss of the biggest toy retailer sent shock waves through the toy industry.”

What’s more, every day was Black Friday at Toys R Us — at least for Hasbro and its ilk. Says Johnson: “It bought toys year round while many retailers that toy manufacturers have to rely on now, such as drug stores, have more seasonal demands and buying patterns.”

Yet if you can believe it, HAS is in good shape compared to Mattel ( MAT). With its most recent report, Mattel posted adjusted earnings per share of 18 cents compared to analysts’ expectations of 20 cents. That might not sound so bad, until you look at the larger picture of workforce attrition and sales.

“The firm recently eliminated more than 2,200 jobs and while Barbie sales were up 14 percent globally, Hot Wheels sales fell 6 percent, Fisher-Price sales fell 12 percent and American Girl sales fell by an astounding 31 percent,” Johnson says.

In fact, the death of Toys R Us was enough to kill Mattel’s dividend, at least temporarily. Citing the bankruptcy, MAT stopped its quarterly payouts — which dated to the 1970s — at the end of 2017 and has not restored them. But the hope is that the extra $50 million per quarter this freed up created a stopgap that will allow the dividend to resume once other retailers pick up the slack.

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It’s been an opposite story for Hasbro, which actually raised its quarterly dividend by more that 10 percent — from 57 to 63 cents per share — as of its July 31 payout. The new amount more than doubles the dividend in 2011, which was 30 cents.

Meanwhile, the Toys R Us drama may mean some ideal buying opportunities for investors. D.A. Davidson & Co. recommends HAS as a “buy,” adding that, “it’s all about 2019.” Davidson has set a price target of $112 per share in the next 12-18 months, which would mark a jump of 15 percent. Shareholders already seem poised for the comeback, as Hasbro has rebounded by 6 percent since Oct. 24.

“In the third quarter of 2018, about a third of the lost Toys R Us sales were replaced and we expect that figure to go even higher in the fourth quarter,” says Linda Bolton Weiser, senior research analyst with D.A. Davidson.

Weiser also points to a number of movie franchises that could bolster any toy franchise: “Growth drivers next year include Disney’s ( DIS) ‘Frozen 2’ and ‘Aladdin,’ ‘Star Wars Episode IX,’ and ‘Captain Marvel’ and ‘Avengers’ from Marvel.”

As for MAT, Davidson remains in a “neutral” mode, as that toy company’s struggles have been complicated by reductions in inventory headed for China. Davidson recently revised its MAT forecast for estimated sales in the fourth quarter of 2018, from minus 1 percent year-over-year to minus 11 percent.

In any event, the Toys R Us void isn’t bound to last too long.

“Many retailers are there trying to fill the gap: Walmart ( WMT), Target ( TGT), Bed Bath & Beyond ( BBBY), Michaels ( MIK), Five Below ( FIVE), and of course, Amazon ( AMZN),” says David Tawil, president at Maglan Capital in New York City. “I think that toy manufacturers and wholesalers will not see a massive drop during the upcoming holiday season.”

In fact, one brand that could come riding to the rescue at some point in 2019 is the very same one that started the toy sector shakeup in the first place.

[See: 7 Founder-CEOs Doing Fabulously for Shareholders.]

On Oct. 2, a group known as Geoffrey LLC announced it was moving forward with a plan to restart Toys R Us. “The new owners are actively working with potential partners to develop ideas for new Toys R Us and Babies R Us stores in the United States and abroad that could bring back these iconic brands in a new and reimagined way,” said a statement posted on the former Toys R Us website.

Perhaps the would-be saviors should’ve stayed silent as a giraffe. For if there’s anything toy manufacturers hate, it’s someone having fun and playing games — with their stock, of course.

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How Toy Stocks Test Investors originally appeared on usnews.com