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Is the Grinch Stealing Christmas for These 2 Toy Stocks?

Motley Fool - Thu Oct 26, 2023

Investors have been nervous about the stock market lately, and Thursday morning didn't bring any immediate relief. Even though the latest government data showed continued strong economic growth in the third quarter of 2023, many market participants worry that high inflation could persist that in turn could force the Federal Reserve to push the U.S. economy into a recession. Stock index futures were down as much as two-thirds of a percent early Thursday.

As the holiday season approaches, many shoppers are starting to think about how they can get presents for the children in their lives. For toymakers Hasbro (NASDAQ: HAS) and Mattel (NASDAQ: MAT), the last three months of the year are the most important season for their respective businesses. However, both stocks fell sharply following the release of their results from the summer months, and many seem to think that the end of 2023 might not be as favorable for toy stocks as previously thought. Here's the latest from Hasbro and Mattel.

Hasbro sees slower sales of consumer products

Shares of Hasbro were down 13% in premarket trading early Thursday. The toymaker reported third-quarter financial results that demonstrated just how challenging the retail environment is right now, and it projected that the key holiday quarter might not shape up as well as previously hoped.

Hasbro reported net revenue of $1.5 billion, which was down 10% year over year. However, adjusted net income rose 16% from year-ago levels to $228 million, and that worked out to $1.64 per share in adjusted earnings.

A closer look at Hasbro's business showed pockets of strength and weakness. The Wizards of the Coast and digital gaming segment was incredibly strong, with revenue jumping 40% from the year-earlier period and adjusted operating profit nearly doubling from the third quarter of 2022. However, revenue in the entertainment division plunged 42%, and the key consumer products segment suffered an 18% drop in sales during the period. Hasbro pointed to soft industry trends and inventory management moves from resellers as weighing on the consumer products business.

Hasbro was pessimistic about its near-term guidance, expecting a revenue decline of 13% to 15% in the fourth quarter due to anticipated weakness in toy sales within consumer products. Combined with a drop of 25% to 30% in entertainment and a moderation of growth in digital gaming, Hasbro faces a long road ahead as it tries to continue transforming its business to emphasize profitable growth.

Mattel can't ride the Barbie wave higher

Rival Mattel didn't fare any better, as its stock dropped 12% in premarket trading. Even with the success of the company's iconic Barbie, Mattel still faces some big challenges for the coming holiday quarter.

Mattel's numbers looked better than Hasbro's. Revenue of $1.92 billion was up 9% from year-ago levels. Improving margin levels helped bolster Mattel's bottom line, with adjusted earnings of $1.08 per share up 32% year over year.

Moreover, Mattel's near-term outlook was more favorable. The toymaker actually increased its full-year 2023 guidance on adjusted gross margin and earnings per share, now anticipating $1.15 to $1.25 per share. However, that still compares poorly with the $1.25 per share in adjusted earnings that Mattel brought in during 2022.

Mattel CEO Ynon Kreiz pointed to the Barbie movie as a key driver of success. However, even though CFO Anthony DiSilvestro cited expectations for a strong holiday season, shareholders seemed instead to focus on comments about macroeconomic conditions weighing on consumer demand. Investors will now have to wait and see how holiday shopping actually goes and what effect it has on business for both Mattel and Hasbro.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Hasbro. The Motley Fool has a disclosure policy.

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