Daily Gains Letter

This One Company Is Bucking the Downward Trend in Toys and Games

By for Daily Gains Letter |

Corporate EarningsSometimes, smaller companies are better equipped to take advantage of an economy in flux, in part because they can develop strategies and adapt more quickly than larger firms.

That’s what’s happening in the U.S. toys and games industry, as one small company has been showing solid growth while the big boys are faltering.

Traditionally, the toys and games industry is an important contributor to the U.S. economy. In 2012, it is estimated that the U.S. toys and games industry employed 31,000 people and generated around $20.0 billion per year in retail sales. With a 26.3% share of the annual global market, the U.S. is the top retail market for toys. (Sources: “Annual Sales Data,” Toy Association web site, last accessed July 17, 2013; “Toy Markets in the World Annual 2010,” Toy Association web site, October 17, 2011, last accessed July 18, 2013.)

Unfortunately, the weak economy, lower earnings, and changing attitudes are having an impact on some of America’s biggest toy manufacturers. On Wednesday, Mattel, Inc. (NASDAQ/MAT), the world’s largest toymaker, announced its second-quarter corporate earnings.

The company reported that earnings fell 24%, as kids continue to turn their back on its iconic product, “Barbie.” (Source: “Mattel Reports Second Quarter 2013 Financial Results — Declares Third Quarter Dividend and Increases Share Repurchase Program,” Mattel, Inc. web site, July 17, 2013.) Second-quarter worldwide sales of Barbies fell 12% year-over-year, which represents the fourth straight month of declines for Mattel’s flagship product.

By late Wednesday afternoon, investors responded to Mattel’s weak earnings results by sending its share price down more than seven percent.

Investors spooked by Mattel’s earnings also sent Hasbro, Inc.’s (NASDAQ/HAS) share price down more than three percent on Wednesday. Investors will get a better grasp of the U.S. toy industry on July 22, when Hasbro releases its own corporate earnings.

But while toy industry sales have been down all year on the back of weak consumer spending and demand for less traditional entertainment products (particularly handheld electronics), sales and earnings are expected to pick up in the second half of the year, with shipments of new products for the holiday season.

One bright spot for the industry is that U.S. consumer spending rebounded in May, after the largest drop in more than three years. (Source: “Consumer Spending Turns Up in May,” U.S. Bureau of Economic Analysis web site, June 27, 2013, last accessed July 18, 2013.)

When it comes to toys and games, Mattel and Hasbro are probably the first companies that come to mind, but if you’re looking for a better earnings growth opportunity, you might want to consider the much smaller and culturally relevant LeapFrog Enterprises, Inc. (NYSE/LF).

On a day when Mattel and Hasbro were solidly in the red, LeapFrog was up more than two percent.

The Emeryville, California-based toymaker develops interactive reading systems, educational games, books, and learning toys. Its best-selling brands include LeapPad, Leapster, Learning Path, Didj, and Tag Reading System. The company’s new “LeapPad Ultra” has been recognized by two of the biggest retailers in the U.K. as a top-10 item for children this holiday season—an important designation when you consider the majority of LeapFrog’s business comes in the second half of the year.

North American investors will get an even more complete picture of the U.S. toys and games industry on August 1, when LeapFrog announces its second-quarter earnings results.

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