'Emptiest Toy Shelves We've Ever Seen': DA Davidson Reiterates Buy on Mattel (MAT) and Hasbro (HAS) Amid Strong Holiday Season
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Recent checks witnessed “nearly bare toy shelves at WMT,” which points towards a strong holiday season for retailers.
“In 2021, our WMT and TGT in-store checks showed increases in December out-of-stocks compared to last year and Black Friday: at WMT, 98% vs. 78% last year and 73% on Black Friday, and at TGT, 76% vs. 56% last year and 52% on Black Friday. Many of the shelves in WMT's toy section in the store we checked were nearly bare, something we had not seen in our many years of holiday store checks,” Bolton Weiser said in a client note.
Hence, the analyst believes that retailers are now expected to “reorder heavily in 1Q22.” As a result, Bolton Weiser sees upside in Hasbro stock, and especially Mattel as it trades at a “relatively low valuation.”
“[On MAT] we think consensus of $244M (-14% Y/Y) builds in adequate conservatism to reflect cost pressures, given that toy price increases were implemented in 3Q21 and should have a bigger positive effect on gross margin in 4Q21; the consensus gross margin is -280bp Y/Y, the same as the Y/Y decline in 3Q21. We expect a bigger Y/Y increase in A&P spending in 4Q21 than in 3Q21, which should drive continuing strong POS and share gain for the sixth consecutive quarter, and result in clean year- end retail inventories and sales growth in 1Q22 (consensus is for sales -4% Y/Y). Our $36 PT is based on 13x 2023E EBITDA of $1,105M.”
As far as Hasbro is concerned, the analyst has a price target of $140.00 per share.
“HAS' supply chain management was not as stellar as MAT's in 3Q21, and it reported toy sales -3%. It did expect $100M to shift into 4Q21, which would add 800bp to toy sales growth; we are modeling toy sales -3% Y/Y in 4Q21, which seems conservative. We expect total revenue +6.4% to $1,834M due to double-digit growth in Wizards & Digital Gaming and Entertainment; our revenue estimate could be conservative (consensus is $1,869M, +8.5% Y/Y). Gross margin should increase Y/Y in 4Q21 as in 3Q21, due to the high growth of Wizards & Digital Gaming. Because of increases in advertising and program production cost amortization, we are modeling a 27% Y/Y decline in operating profit to $190M, which exceeds consensus of $187M. Our $140 PT is based on 25x 2023E EPS of $5.58,” the analyst added.
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