TOYS ‘R’ US LIQUIDATION COULD DRAG ON TOYMAKERS.
FP8
The l i quidation of Toys “R” Us stores in the United States will likely have a larger impact than originally anticipated on the shares of toy manufacturers, including Canada’s Spin Master, according to a recent research note from BMO Capital Markets.
In a report released last week, analyst Gerrick Johnson said the decision to liquidate the U. S. stores came as “a shock, but not necessarily a surprise.”
BMO had originally modelled estimates based on the closure of 200 stores following the retailer’s bankruptcy filing in September, and subsequently doubled that number to 400 stores.
But the l i quidation is now expected to involve 735 stores, according to media reports.
In addition to Spin Master, Johnson also reduced his target prices for Hasbro and Mattel — all three, as well as JAKKS Pacific, could take hits due both to their outstanding accounts receivable with Toys “R” Us and a potential loss of sales going forward.
Johnson estimated Hasbro and Spin Master both had outstanding accounts receivable of around US$ 20 million, while Mattel’s were US$ 37 million and JAKKS Pacific’s were US$24 million.
In an interview, Johnson said impulse purchases at other retailers such as WalMart may not be as frequent as they were at Toys “R” Us.
“If you walked into Toys ‘R’ Us you pass thousands of products. You pass by WalMart you’ ll walk by hundreds, not thousands,” he said.
For all four companies, Johnson assumed that by 2019, 75 per cent of any lost sales due to the Toys “R” Us liquidation will have been accounted for elsewhere.
For Spin Master, that led him to drop his target 2019 net revenues to $ 1.78- billion from $ 1.793 billion. He expects Spin Master to grow revenues by 5.3 per cent in 2018.
Johnson said he expected the category of “boys’ action, high- tech and construction” to be the biggest contributor to Spin Master’s increase in gross product sales heading into 2019.
Johnson said a major contributor to this estimate is the anticipated release of the movie How to Train Your Dragon 3 in 2019.
As a result of the Toys “R” Us liquidation, BMO reduced its target price for Spin Master to $56 from $63. The shares closed at $ 51.90 in Toronto Tuesday.
The target price for Hasbro was also cut to US$ 83 from US$ 96 and for Mattel to US$17 from US$23.
Liquidation is to begin immediately and be completed by July 31. Toys “R” Us is looking for a potential buyer for its international locations, and a result is not expected until mid-April.