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Report On Business Mega Brands lays building blocks for growth in tough market

Mega Bloks printed bags are shown in Mega Brands’ Canadian factory. Canada’s national champion in the global toy market is working on a growth strategy that includes a target of $500-million in sales by next year.

The Canadian Press

Mega Brands Inc., Canada's national champion in the global toy market, is working on a growth strategy that includes a target of $500-million in sales by next year.

As the Montreal-based company attempts to reach that goal – revenues in 2012 were $420.3-million – it's dealing with some significant challenges in a tough toy market.

Company executives are expected to shed some light on what kind of year 2013 is shaping up to be after second-quarter earnings are released on Thursday, Aug. 1.

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Judging by the quarterly results put out recently by three toy-makers in the U.S. – Mattel Inc., Hasbro Inc. and Jakks Pacific Inc. – the numbers may not be too impressive.

All three U.S. companies fell short of Wall Street expectations, keeping in mind that the second quarter is a seasonally weak period.

BMO Nesbitt Burns analyst Gerrick Johnson said in a recent research report he's become somewhat cautious on Mega Brands, especially going into the second quarter.

Some key lines may not have lived up to expectations, he believes, singling out the new Barbie-themed construction sets.

"We have observed very good sell-in to retail, but we have not seen robust retail takeaway, which may limit orders," he wrote.

Mega Brands struck a multiyear deal with Mattel last year for the licensing rights to the Barbie brand in a move to win over more girls on the construction front.

Since then, the iconic plastic doll's popularity has been fading fast. Sales fell 12 per cent in the past three months alone.

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But Lutz Muller, head of toy industry consultants Klosters Trading Corp., says Mega Brands has benefited from Mega Bloks Barbie's shelf placement next to the hugely popular Lego Friends line for girls in Target and Wal-Mart stores, and also from Lego's problems keeping up with demand for Friends product.

"I don't think that in the short term the decline of Barbie is going to affect Mega Brands at all," said Mr. Muller.

Neil Linsdell of Industrial Alliance Securities says he anticipates a good year for Mega Brands as it ramps up the Barbie construction line, launched in limited quantities just before Christmas last year.

"We'll also see the launch of the Hot Wheels construction toys this fall, which should further strengthen the latter half of the year," he said in an e-mail.

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