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Mega Brands results get some help from Rose Art

File photo of Marc Bertrand, CEO of Mega Brands.

John Morstad/john morstad The Globe and Mail

For much of the past six years, problems stemming from Mega Brands Inc. 's 2005 purchase of the Rose Art group of companies have clouded generally steady performance by the Montreal company's mainstay construction-toy business.

In the fourth quarter, however, that was reversed. The toy company's Rose Art stationery and activities business, which Mega Brands tried to sell four years ago, posted its third straight increase in quarterly sales after 15 consecutive quarters of year-over-year declines.

Revenue for the stationery and activities business in the quarter ended Dec. 31, a period of the year when sales are typically lower, was $17.9-million, up 35 per cent over the same period a year earlier.

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That revitalized performance, however, was overshadowed by a weak performance in its Mega Bloks construction-toy division, dragging down overall results and the stock price. Toy sales fell by 8 per cent in the quarter, leading to overall net sales of $108.5-million, down 3 per cent from the same period a year earlier.

Meanwhile, Mega Brands barely eked out a profit of $234,000, or 1 cent a share, down from $11.3-million in the same period a year earlier. That was well below analyst expectations of a $7.9-million profit on sales of $120-million.

The results released Wednesday disappointed investors, who drove down the stock price by 19 per cent on the Toronto Stock Exchange.

"They had good products, their results should have been stronger," said BMO Nesbitt Burns Inc. analyst Gerrick Johnson, who was expecting a 13-per-cent increase in sales. "That was a surprise."

Chief executive officer Marc Bertrand blamed the drop largely on challenging conditions in the United States, where overall toy sales plummeted by 9 per cent in December after 11 months of gains.

"We were expecting more shipments," Mr. Bertrand said during a conference call with analysts. "So we have some toy inventory that we were planning to sell, and we were hoping it would be out at retail, not in our warehouse."

He noted the company's construction-toy sales were also disappointing, relative to other toy makers in 2011, rising by only 2 per cent as sales for the category over all rose by 23 per cent in the United States.

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In addition, Mega Brands' gross margins continued to suffer because of higher prices for plastic resin, a stronger Canadian dollar, and rising manufacturing costs in China.

But Mr. Bertrand said he is "optimistic" about sales this year as Mega Brands launches products tied in with the World of Warcraft video game, a new Spiderman movie and the Power Rangers Samurai television show.

Analysts were impressed by the Rose Art business, which had $96.3-million in sales last year, up 3 per cent from 2010. It was the division's first annual increase since 2006, when it rang up $214-million in sales – and the company was on the verge of years of product recalls, sales declines, lawsuits and a financial restructuring stemming from problems at Rose Art.

"It's been a solid comeback and you'll see improvement as we get to the back-to-school season," said Neil Linsdell, an analyst with Versant Partners. "For the past few years, investors were worried about [Rose Art]and it caused a drag on the stock. Now it's turned the corner and is actually being a good contributor."

He credited Thomas Prichard, a former senior executive with Crayola, Pixar Animation Studios and Hasbro, hired 16 months ago to turn around the Rose Art business, with launching new products and winning shelf space from retailers. "He's really turned it around," Mr. Linsdell said.

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