The days may be numbered for Geoffrey the Giraffe, and investors of publicly traded toy makers are feeling the pinch. Shares of Hasbro (NASDAQ: HAS), Mattel (NASDAQ: MAT), and JAKKS Pacific (NASDAQ: JAKK) took hits of 2% to 5% on Wednesday, after reports surfaced that Toys R Us is hiring a firm to help restructure its debt by potentially filing for bankruptcy protection.
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The possible bankruptcy of the country's largest dedicated toy retailer is naturally going to send shock waves through the companies that arm its shelf space. If Toys R Us files for reorganization, it would mean that creditors may have to take pennies on the dollar, and that isn't going to bode well for the payments that the toy manufacturers expect for their products. Beyond the near-term hit, the long-term concern is that Toys R Us may have to eventually liquidate, giving Hasbro, Mattel, and JAKKS Pacific one less outlet to market their playthings.
These are scary times for Toys R Us, just as they've been for most brick-and-mortar chains. But the toy makers themselves don't have to be scared.
Where the toys are
Toys R Us is obviously one of the biggest sources of revenue for the toy industry. In an analyst note on Thursday, Stephanie Wissink at Jefferies points out that Hasbro, Mattel, and JAKKS Pacific rely on the troubled chain for 11%, 9%, and 15% of their revenue, respectively. However, as Wissink rightfully remarks, any potential loss from Toys R Us scaling back if not disappearing entirely would simply shift to alternate channels.
Parents don't just stop buying toys because a retailer goes Obit City. Toymakers didn't fade away after FAO Schwarz, KB Toys, and Zany Brainy went kaput. If Toys R Us is liquidated -- and that would be much further on the reorganization timelines -- those sales will go to department stores and online specialists that would broaden their offerings to make the most of the opportunity.
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The real fear here is that Toys R Us getting shuttered might be symptomatic of a trend away from playthings in general. The end of the last major dedicated superstore chain may signal that toys and games are no longer appealing enough for a stand-alone retailer. We live in a world where young kids are spending money on apps and other digital goodies that bypass physical distribution. However, that hasn't necessarily impacted all of the major toy companies.
Hasbro has been a rock star, posting double-digit revenue growth in six of the past seven quarters. Mattel has been a laggard with sales declining slightly for three consecutive years. The smaller JAKKS is working on back-to-back years of top-line declines. However, analysts see all three smile makers posting an increase in revenue next year. The loss of Toys R Us isn't ideal, but it's not the end of the game. Approach any continuing weakness as a buying opportunity. As any parent knows, it's never too early to go holiday shopping if the prices are low.
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