Hasbro Outplays Mattel, Scores A Win With Digital Gaming

Toy giant Mattel
MAT
released its first quarter earnings after the market closed yesterday, reporting a worse-than=expected loss.

Its top rival Hasbro
HAS
this morning reported greater-than-expected revenues, and a slight profit, and saw its stock price jump by as much as 13%.

The difference? Hasbro has magic – specifically the role-playing game Magic
MAGIC
The Gathering – and a strong digital gaming division, on its side.

Both companies saw their sales of traditional toys decline as retailers continued to clear out overstocked inventory left over from last year.

Hasbro and Mattel both have been focused in recent years on diversifying their revenue bases beyond traditional toys.

But their earnings results show that Hasbro is ahead of the game on that front.

Revenue from Hasbro’s digital gaming, and its Wizards of the Coast division, which includes cards and accessories for in-person games of Magic The Gathering and Dungeons and Dragons, was up 14% in constant currency for the quarter.

Hasbro is counting on the strong critical and box office response to the Dungeons and Dragons: Honor Among Thieves movie, released in March, to drive future growth, particularly internationally.

“A great reviewed movie that has a lot of fan enthusiasm, is a perfect opportunity and a perfect entry point into the brand,” Hasbro CEO Chris Cocks said in a earning call with analysts.

Hasbro, Cocks said, is investing in new digital experiences, such as a Dungeons and Dragons virtual table top, to make the game accessible to new players.

That kind of “low barrier-entry digital experience is really going to be kind of the flywheel that drives the brand’s growth over the next couple of years,” he said.

Digital gaming also doesn’t have the inventory and markdown headaches of traditional toys, a problem that challenged both Hasbro and Mattel during the first quarter.

Hasbro’s consumer products segment saw its revenues drop by 21%, primarily due to markdowns needed to clear excess inventory.

Mattel reported that net sales were down 21% in constant currency, with traditional categories such as dolls, action figures, and infant, toddler, and preschool seeing bigger percentage drops. Action figures was down 36% in constant currency; infants, toddler and preschool was down 26% in constant currency; and dolls was down 22% in constant currency.

Mattel CEO Ynon Kreiz, in the analyst call yesterday, said he expects the inventory issues that caused those declines to continue in the second quarter, but to be fully resolved as the third quarter begins.

Kreiz said he remains optimistic about the year and said Mattel is on track to meet its goals for the full year.

“The fundamentals of our business are strong. We expect to outpace the industry, gain market-share and achieve our full-year guidance,” Kreiz told analysts.

Investors appear to agree with that assessment.

Mattel’s stock price rose slightly Wednesday after the earnings release, and was up 6% as of 2 pm. today.

Hasbro’s stock was up just over 13% as of 2 p.m.

Investment bank UBS, in a note issued after Mattel’s earnings call, maintained its buy rating on the stock, with a target price of $29..

An April 20 report on the toy industry by UBS analysts Alpine Kocharyan and Robin Farley noted that the toy industry in the United States is up 30% compared to 2019, causing fears that if demand drops back to 2019, pre-pandemic levels, there will be significant sales declines.

Toy sales during the quarter were hurt by a lack of newness, as big retailers opted to clear out old inventory rather than but fresh products on the shelves, James Zahn, editor-in-chief of The Toy Book, said in response to emailed questions.

“Newness fuels the toy industry and the first quarter was severely lacking,” Zahn said. “Major retailers cut back on orders and some didn’t even take new lines for spring due to the backlog of inventory left over from the slowdown during the holiday season,” Zahn said, adding that Mattel’s and Hasbro’s results were “very much in line with expectations for the quarter,” overall.

Both companies, Zahn said, have good reasons to be optimistic about the second half of the year, but they will “need to be razor-focused on connecting with consumers to make up for the first half.”

This year boasts the best entertainment lineup for toy sales in years, “and the fact that families are returning to theaters – as evidenced by the success of The Super Mario Bros Movie – bodes well,” he said.

The toy industry, Zahn said, is in the midst of a “reset year.”

“The business is finally returning to the pre-pandemic levels of predictability, but the majors really need to work on being able to pivot quicker,” Zahn said. “Private companies, such as Jazwares and MGA Entertainment, has been able to get new products into the stores quicker of late.”

“Once the majors come around and reset their toy departments with fresh products, I believe that sales will kick in and energize the industry as we head into a brighter holiday season,” Zahn said.