This week's U.S. Thanksgiving Day holiday is the kickoff to the holiday spending season south of the border, but you'd never know it by looking at toy industry forecasts. This is shaping up to be one of the worst years in the U.S. toy business in at least 30 years (see chart). Here's the truly surprising part, however: Those sliding sales may actually be good news for the U.S. recovery.
Toy sales act counter-cyclically to the economy, according to BMO analyst Gerrick Johnson. They tend to hold up relatively well when the economy goes into recession, as consumers forgo spending on bigger-ticket items rather than disappoint the kids. In better times, though, families often direct their spending to more expensive purchases and forget the trinkets under the tree.
The numbers seem to bear out this counterintuitive theory. In recession-ravaged 2009, U.S. toy sales barely faltered. But this year toy sales are forecast to drop by 3.5 per cent even as the overall U.S. economy shows signs of improvement and sales of bigger-ticket items such as boats (up 10 per cent), motor homes (up 8 per cent) and trips to Disney resorts (up more than 7 per cent) improve.
Changing tastes, not pinched wallets, may be behind the current trauma in the toy aisle. Analysts note that toy sales have been sluggish for years, in part because many customers have shifted to video games and handheld digital devices (which are not counted as toys). In addition, there is a dearth of new, must-have toys such as the Cabbage Patch Kids, Mighty Morphin Power Rangers or Star Wars action figures of yore. (Even an attempt to revive the Furby, a past phenomenon, has fizzled out this year.)
Not all toy categories are being hit equally. Despite the generally slack market, construction toys are doing well, as are tablets for kids. However, the action figure segment is having an off-year – perhaps reflecting resulting a lack of new superheroes in movie theatres – as are board games.
Rather than looking at the toy industry as an economic bellwether, people may want to focus on it as an investment. When an expected revenue drop of just 3.5 per cent is the industry's worst showing in 30 years, it's clear that this is one of the more solid defensive sectors around, fiscal cliff or no.
That's borne out by the stock performance of the industry's two big names, Mattel Inc. and Hasbro Inc. Mattel has risen by about 60 per cent cumulatively since the beginning of 2007 while Hasbro is up 40 per cent. The S&P 500, by contrast, is at about the same level it was almost six years ago, while the Nasdaq has risen by just 20 per cent over the period. Toys are fun for kids; large-cap toy stocks may be an even better security blanket for their parents.
Sean Silcoff