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Hasbro, Inc. (HAS), Mattel, Inc. (MAT): The Real ‘Toy Story’

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For some time, the toy industry has been undergoing a decline in demand due to macro as well as secular reasons. Industry trends remain tepid in both Europe and the US given macroeconomic pressures. Also, a slow but steady shift toward digital forms of entertainment has posed a huge threat to this industry. In these circumstances, it is worthwhile to have a look at some of the toy companies and predict their outlook for the foreseeable future.

Hasbro, Inc. (NASDAQ:HAS)

Goldman is bearish on this company

Hasbro, Inc. (NASDAQ:HAS)

is an old publicly traded toy company. It is set to release its earnings for the second quarter on Jul 22. The company is expected to post EPS of $0.35. However, Goldman Sachs Group Inc (NYSE:GS) believes that the company might be well short of its estimates. This is expected to be led by 6% lower-than-anticipated revenue, which will likely spill through to the profit and loss statement due to fixed cost de-leveraging. The lower revenue forecast is driven by ongoing checks that suggest Hasbro, Inc. (NASDAQ:HAS) is under-performing the broader US toy industry year-to-date (running down in mid-single digits versus a more flattish industry trend).

While it is tough to model toy companies quarter by quarter due to fluctuations in shipments versus retail sales, the magnitude of the gap between Goldman Sachs Group Inc (NYSE:GS)’s forecast and the Street’s leaves enough buffer room for the directional view to be correct even if there are some unexpected positive offsets somewhere in the profit and loss statement.

The biggest argument for a sell rating on this stock is that there is an impending inflection from 2014 through 2015 from sales of Transformers and Star Wars toys. Also, the company has announced a restructuring plan, which will help it to save an annual $100 million after 2014. However, there are two counterpoints. Firstly, Hasbro, Inc. (NASDAQ:HAS) might not be able to achieve full gains from the restructuring due to some re-investments. Moreover, despite accounting for maximum benefits from Transformers and the Star Wars program, the consensus estimates for 2014 and 2015 seem to be highly unattainable.

A company like Hasbro, Inc. (NASDAQ:HAS)

Mattel, Inc. (NASDAQ:MAT)

has a similar revenue base to Hasbro, Inc. (NASDAQ:HAS). Apart from the secular shift toward other forms of entertainment and macro pressures, there are some other problems that it shares with Hasbro, Inc. (NASDAQ:HAS). Both toy companies generate more than 50% of their revenue from sales outside of the US. This means that they are well prone to dollar fluctuations. Recent fears of QE tapering from the Fed sent the dollar surging to record highs, which in turn has posed headwinds for both of these companies.

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