Second quarter financial results, released in July and August, of five of the major publicly traded toy and collectibles companies—Mattel, Hasbro, Spin Master, Jakks Pacific, and Funko—all showed declines (of varying degrees) in topline revenues and net sales during the period, compared to the same timeframe in 2023. The lone exception was Funko, which saw net sales increase by 3%.
An analysis of the companies’ earnings releases and analysts’ calls for Q2 paints a picture of the current state of the toy industry and, to some extent, the entertainment and general licensing business:
- A content-light first half of 2024, coming after a first half of 2023 that featured several top-selling entertainment-based toy lines, made comparisons difficult. Mattel’s gross billings for dolls were down 5% in the quarter compared to The Barbie Movie-centric period of Q2 2023, Spin Master saw declines post-Paw Patrol: The Mighty Movie, Hasbro couldn’t match last year’s Transformers movie success, and Jakks’ action play and collectibles category was down 30.5% in the wake of the success of The Super Mario Bros. Movie. The comparisons were exacerbated by last year’s Hollywood strikes, which led to few TV and films being released in the first half of this year and a resulting lack of tie-in toy launches.
- Similar trends affected entertainment productions tied to toy-origin IP, as some companies saw declines in entertainment revenues due to delays in content deliveries caused by the work stoppages. The toycos remain all-in on entertainment and outbound licensing based on their proprietary properties, however. Mattel said its focus is on growing its entertainment business as a revenue generator and means of driving toy sales, with film and TV shows in development for Masters of the Universe, Barney, Monster High, Hot Wheels, and Barbie. Hasbro’s entertainment revenue declined 30% in the quarter (excluding the divestiture of eOne), but its outbound licensing revenues were up 11% and it has more than 35 entertainment projects in development. Spin Master touted its entertainment initiatives tied to Unicorn Academy and Paw Patrol, while Jakks is bullish on its new Wild Manes, backed by 300 minutes of YouTube animated shorts produced by Epic Story Media.
- Cost-cutting has been an imperative of late, and the companies are making good progress, helping to boost margins. Funko cut expenses by almost 9%, Spin Master is working toward a goal of $25 million to $30 million in net cost synergies by the end of 2026, Mattel is on its way to $200 million in savings, also by 2026, and Hasbro showed $40 million of net cost savings in the quarter, with a goal of $750 million in gross cost savings by 2025. Meanwhile, Jakks and Funko have both significantly reduced their debt.
- Inventories are finally down to healthy levels, including both retail inventories and the toy companies’ owned inventories. Jakks’ was reduced 21% compared to the same quarter last year, representing its lowest level since 2010; Mattel’s declined almost $200 million in the quarter compared to 2023; and Hasbro’s decreased 51% since last year, bringing it to historic lows while still giving it the ability to meet holiday demand, it said. These manageable inventories allow for strong orders and reorders going forward, as well as reducing inventory management costs.
- Higher spot freight rates and a lack of vessels and containers shifted orders out of the second quarter, as customers either ordered early in anticipation of problems or delayed orders to Q3. Mattel’s gross billings were negatively impacted by 2 percentage points during the quarter due to this factor, while Funko saw a bottom-line impact of about $2.5 million. Jakks’ sales were down 31% internationally, versus a decline of 8% in the U.S., due in part to delayed container arrivals and orders shifting to the next quarter. The tendency for major retail customers to prefer a direct-import FOB model makes these issues top of mind. And, while most of the recent challenges have been resolved for now, they may return due to the threat of more port congestion; the closure of shipping routes due to war, weather, and piracy; labor issues; competition for containers from other categories of trade, and other factors. Most of the companies called out that they have improved their ability to address supply chain volatility and match inventory sourcing with demand.
- Toymakers are addressing consumers’ economic concerns by lowering prices and increasing their presence in the value channel, especially in the U.S. The latter strategy is due in part to the sale of aging inventory into this tier of retail, but it is also a means of addressing consumers’ worries about high prices. Spin Master’s average selling price was down 8% in the quarter compared to the second quarter of last year, due to adding more lower-priced items to its merchandise mix.
- Adult toy fans remain a growth sector. Circana found that toy sales to consumers aged 18 and older surpassed sales to any other age group in the first quarter, exceeding preschool toys for the first time, and that 43% of adults purchased a toy for themselves in the past year. Many of the companies specifically mentioned this demographic group as a key sales driver and strategic focus. At Hasbro, 60% of revenue is currently driven by consumers 13 and older.
- Direct-to-consumer channels continue to grow in importance. In addition to the other benefits of DTC from a marketing, fan engagement, and product development standpoint, margins are significantly higher for DTC than wholesale. Mattel noted increases in traffic and subscribers for Mattel Creations, while Hasbro reported 18 million registered users for its largest DTC platform, D&D Beyond, and cited growth in its Hasbro Direct business, focused on exclusive collectibles releases. Funko attributes 25% of its business today to its direct-to-consumer channels, up from 12% in 2022, and saw a 33% quarter-over-quarter increase in its DTC business.
- Digital gaming results were mixed in the quarter, but this area of business remains a strong focus. Hasbro’s digital gaming revenues were up, in part on the strength of its licensed Monopoly Go! game with Scopely, which has grossed $3 billion-plus since its April 2023 launch. Half of the company’s $250 million per year in capital investment is going toward its digital game business; its goal is to ship one to two new games per year from its in-house studio, and it has 150 products active or in development on the licensing side. At Spin Master, digital revenues were lower due to a decline in in-game purchases in Toca Life World, but it has seen higher subscription revenue from Piknik and Paw Patrol Academy. It ultimately wants 20% of total revenue to come from the digital games sector. Mattel licensed Outright Games to produce video games based on its properties and is planning to self-publish mobile games, while Funko Fusion!, which brings together 20 third-party properties into a single game, launches this fall.
- Companies are relying on licensed products to drive healthier sales in the fourth quarter and beyond. They mentioned that they were bullish on entertainment licensing and cited a number of film and television properties, as well as some evergreen entertainment and other types of IP, that they believe will boost their licensed and overall toy business in the months and years ahead.
While most of these public companies showed optimism about their forward progress and their ability to achieve stronger results in the second half, they also acknowledged a number of areas of risk, including interest rates, labor issues, and consumer spending, to name a few. And, of course, there is always the uncertainty about the performance of the upcoming licensed properties in which they are so invested.
Comments are closed.