The toy industry is suffering from a bad case of “movie fatigue,” according to BMO Capital Markets analysts led by Gerrick Johnson, with toys based on movies underperforming expectations.
Hollywood has had its worst summer box office in more than 10 years, with a summer movie season that won’t crack the $4 billion mark.
BMO analysts say the total U.S. box office is down about 5% this year.
“In addition to lackluster performance at the box office, we blame an over-saturated movie market, fatigue in certain properties associated with multiple sequels, and competition from entertainment from other screens for underperformance of movie-related toys,” BMO said.
Lego A/S announced that sales for the first half of 2017 fell 5% year-over-year, its first revenue decline in 13 years. The company plans to cut 1,400 jobs as a result. Sales had gotten a boost from toy sets tied to movies. However, sales in mature markets like the U.S. and Europe have slowed and, according to Jørgen Vig Knudstorphe, Lego brand group chairman, the company’s structure has grown “overly complex.”
BMO said sales of entertainment-related toys have increased to 38% of sales from 15% over the past 10 years. Investor expectations about the contribution of these toys to company profits have risen in kind.
However, BMO analysts contacted industry executives about sales of toys tied to movies and got “overwhelmingly negative” responses.
“The main reason for underperformance, in our view, is that there are too many movies being released and released too frequently,” BMO wrote. “Aside from cannibalization, the rapid release of new movies makes each movie less relevant, less able to stand out amongst a crowded field, and limits general buzz.”
BMO rates Hasbro shares market perform, but cut its price target to $90 from $95.
Analysts there rate Mattel outperform and lowered the price target to $23 from $25.
BMO maintained its outperform stock rating for Spin Master Corp.
, along with its C$68 price target, and maintained its market perform stock rating for Jakks Pacific Inc.
and its $3.50 price target.
KeyBanc Capital Markets analysts are more bullish about toys.
“We expect the toy industry to continue to benefit from several fundamental drivers, including developed and emerging-market household formation, accelerating industry shifts toward entertainment and content-driven properties, and an adoptable business model in an evolving retail landscape (e-commerce),” analysts wrote in a note published last week.
Earlier this year, Goldman Sachs analyst Michael Ng called “entertainment-backed toys” a differentiator for toy manufacturers, and said Hasbro was “best-in-class” due to products tied to Marvel, “Star Wars,” Disney Princess and Transformers.
KeyBanc also favors Hasbro over Mattel because of Hasbro’s “integrated content model and entertainment calendar.”
Mattel’s Chief Executive Margo Georgiadis said on the company’s July earnings call that “Cars 3” toy sales were shaping up to be on the lower end of the company’s plan.
In more recent retail checks conducted by Stifel analysts, several entertainment properties, including “Cars 3” and “Despicable Me 3” were discounted. Domestic box office numbers for both of those movies, along with “Transformers: The Last Knight,” the latest installment of the Transformers franchise, were down from their predecessors.
“August is typically a slower period (at retail) for the category, but provides some confirmation around product that worked/didn’t work during calendar second-quarter, and a glimpse of what’s to come for the holidays,” Stifel said in a Tuesday note.
Stifel rates Hasbro, Mattel and Jakks Pacific shares hold.
“Based on these and other findings, from a trading perspective, we have a neutral/slightly negative near-term bias on the group,” the Stifel note said.
Hasbro shares are up 22.6% for the year so far, Mattel shares are down 41.1% for the period, Jakks Pacific shares are down 35.4%, and Spin Master shares are up 34.5% for the period.
The S&P 500 index
is up 9.8% for 2017 so far.