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Get Four
|  | NOVEMBER 24, 2003
So Many Toys, So Little Joy [Page 2 of 2] LEAPFROG FLOPS. Boosting profits remains an elusive game. Mattel, maker of Barbie, Hot Wheels, and Fisher-Price brands, posted third-quarter sales that were essentially flat, while profit margins slipped. Gross margin was 49.3% in the third quarter, a decline of 1.1 percentage points from a year ago. Much of the drop was due to higher costs for raw materials used to make and package toys. Even LeapFrog Enterprises (LF ) the rising star of toy manufacturing, now ranked No. 3 with an expected $679 million in sales, according to Piper Jaffray, is under pressure. On Oct. 22 it announced a 25% increase in net profits in the third quarter, to $33.4 million on sales of $204 million, but it missed analysts' estimates nonetheless. The high-flying shares had plunged from $46 before the announcement to $30 by Nov. 20 (BW subscribers see, 12/1/03, "Leapfrogging Leapfrog"). The pressure on profits isn't going away as retailers increasingly compete on price. Independent toy consultant Chris Byrne sums up the dynamic: "One word: Wal-Mart." He, like many in the industry, believes the No. 1 toy seller in the U.S. is selling hot advertised items below cost. "They squeeze margin, and in some places eliminate it," he says. A BIG THREE. A survey of toy prices by Prudential Equity Group analysts found that Wal-Mart's (WMT ) prices on a basket of top-selling toys was 5.5% cheaper than Toys 'R' Us and 11.2% cheaper than Target (TGT ). "Wal-Mart appears to be far more aggressive on price this year than last," Prudential's Nov. 12 report concluded. Why so aggressive? Retailers of all stripes are trying to attract toy shoppers to their stores in hopes they'll buy higher-margin items in other departments. Piper Jaffray estimates that by yearend the top three retailers, all of which are gaining market share, will control 50% of the U.S. toy market (Wal-Mart with 20%, Toys 'R' Us with 18%, and Target with 12%). Manufacturers scrambling to find ways to make products cheaper have already outsourced the vast majority of production overseas. Piper Jaffray estimates that 90% of toys are imported, most of them from China. Mattel and Hasbro are improving fundamentals mainly by reducing costs and eliminating debt. WHAT ELSE YA GOT? Demographics aren't helping the industry, either. The 88 million children of the baby boomers are growing out of the toy-playing stage. In 2000, children under 12 made up 21.3% of the population, a recent low, and are estimated to decline to 19.8% in the next 10 years, according to Harris Nesbitt Gerard analyst Sean McGowan, who believes the number of children between ages five and nine is dropping in absolute terms as well. Plus, children seem to be outgrowing their toys at an earlier age, says Maria Weiskott, editor-in-chief of toy industry trade magazine Playthings. Kids as young as nine may feel bored with toys that 12-year-olds used to embrace. "That's hitting the traditional toy industry very hard," she says. "Kids are more sophisticated, and therefore the industry is hard-pressed to come out with more sophisticated toys," she says. NPD estimates 62% of toys purchased are requested by the child. So far this year the industry doesn't have a winner on its roster that will ignite sales. "There's no real standout toy that we've seen that's going to take off and drive the industry in the fourth quarter," says Michael Redmond, senior industry analyst at NPD, which found consumer shopping excitement "chilly" in an October survey. It also noted that parents plan to do less buying at discounters this year, which could give the manufacturers a little more leverage to increase profit margins next year. "Consumers have gotten smarter," Byrne says. "They're deciding 'I'm not going out in the snow at 4 a.m. to stand outside of a Toys 'R' Us for a hot toy." For now, many companies in the industry are having trouble staying afloat, even as children swim in year-round sea of toys.
 By Amey Stone, with Amy Tsao and Eric Wahlgren, in New York Edited by Douglas Harbrecht Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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