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Toy Makers Feel the Force of Star Wars

16 February 2016 in Trading Ideas

Key Takeaways

  • The latest Star Wars movie has helped the recent quarterly profit reports for Hasbro, Inc. and Mattel, Inc.
  • Amid future movie tie-in promotions, the two companies have reportedly engaged in merger talks.
  • Motifs mentioned: Child's Play
  • Stocks mentioned: Walt Disney Co (NYSE:DIS), Hasbro, Inc. (NYSE: HAS), Mattel (NYSE:MAT).

It wasn’t hard to spot the main driver behind Walt Disney Co’s (NYSE:DIS) recently announced 28% boost to its quarterly profit.

The company disclosed that the latest and seventh installment of the Star Wars franchise – The Force Awakens – allowed its studio arm to deliver operating income of $1.01 billion as the movie has taken in more than $2 billion worldwide since its mid-December release.1

The studio also said it has benefitted from the international distribution of classic Star Wars films on television and streaming services, according to The New York Times.

Disney also gets an undisclosed portion of sales from merchandise related to the new film.

Oh, and about those merchandise sales – their impact hasn’t been too shabby for the companies that are delivering them to consumers.

Last week, Hasbro, Inc. (NYSE: HAS) reported strong revenue during the recent holiday period, helped by a surge in demand for lightsabers, action figures and other toys tied to Star Wars. The company’s deep lineup of toys related to the blockbuster film led to a 35% sales increase in its boys segment, helping overall revenue rise 13% to $1.47 billion.2

Hasbro Chief Executive Brian Goldner said the company’s overall Star Wars business for the year was “very similar” to the nearly $500 million the company made in 2005 when the last installment of the movie hit theaters.

Star Wars was an overall boon to the toy industry last year, as collectors and children clamored for new toys tied to the franchise’s newest feature film in a decade. It was the largest toy property in 2015, helping the overall industry increase toy sales 6.7% last year, according to the NPD Group, the best results in more than 10 years.

Hasbro rival Mattel (NYSE:MAT), which makes Star Wars-based Hot Wheels toys, reported that its fourth-quarter profit that increased 21%, beating Wall Street’s forecasts. It benefited from an 8% revenue increase in Barbie dolls and a 26% jump in its wheels segment, which includes Hot Wheels and Matchbox cars, on a constant-currency basis.3

The company’s fourth-quarter profit marked its first quarterly gain in more than two years. Analysts expect full-year earnings per share to resume growth at 12% this year and 25% in 2017, after big declines the past two years.

The two toy makers’ respective earnings reports have helped the shares of both companies recently. Shares of Hasbro are up 4% this year, while Mattel’s stock has gained more than 13%.

The stocks make up a 15.8% weighting in the Child’s Play motif, which is down 0.1% in the past month. In that same time, the S&P 500 has lost 3%.

In the last 12 months, the motif has decreased 2.6%; the S&P 500 is down 11.1%.

Star Wars may continue lending a helping hand. Last week, Hasbro CEO Brian Goldner said he believed 2016 “could be as big as 2015,” explaining that its toys business may benefit from the movie’s home entertainment release in the spring and a new installment called Rogue One: A Star Wars Story arriving in theaters in mid-December. ‘”We are already selling product around Rey — the character that was revealed after Force Awakens broke,” Goldner said.4

Longer-term, Hasbro is still looking to add profit from the popular Transformers movie franchise. Goldner said the company will likely have toys based upon three additional Transformers movies arriving in theaters in 2017, 2018 and 2019.

As both companies angle for more film-related revenue, however, another potentially huge development could be waiting in the wings – according to a Bloomberg story last week, Mattel and Hasbro have held talks about merging the two companies.5

Should a deal succeed, it would bring together Mattel’s strength in the girls category and Hasbro’s dominance over the boys’ toy aisle, while making the combined company a stronger competitor to Denmark’s Lego, which has been growing faster than either of its US rivals.

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  1. Brooks Barnes, “’Star Wars’ Sales Propel Disney Earnings, but ESPN Slips,” nytimes.com, Feb. 9, 2016, http://www.nytimes.com/2016/02/10/business/media/disney-earnings-rise-28-but-cable-unit-slips.html, (accessed Feb. 14, 2016).
  2. Paul Ziobro and Austen Hufford, “’Star Wars’ Is the Force Behind Strong Hasbro Sales,” wsj.com, Feb. 8, 2016.
  3. Paul Ziobro, “Mattel Revenue Grows as Barbie Sales Increase,” Feb. 1, 2016.
  4. Brian Sozzi, “Hasbro CEO: The Force Still With ‘Star Wars’ Toy Sales,” thestreet.com, Feb. 12, 2016, http://www.thestreet.com/story/13457596/1/hasbro-ceo-the-force-still-with-star-wars-toy-sales.html?puc=yahoo&cm_ven=YAHOO, (accessed Feb. 14, 2016).
  5. Ed Hammond, Alex Sherman, Jeff McCracken, “Hasbro, Mattel Said to Have Held Talks About Possible Merger,” Bloomberg.com, Feb. 4, 2016, http://www.bloomberg.com/news/articles/2016-02-04/hasbro-mattel-said-to-have-held-talks-about-possible-merger-ik8jsx1q?cmpid=yhoo.headline, (accessed Feb. 4, 2016).