Spin Master says toy retailers and new entrants fighting for Toys ‘R’ Us sales

Rival retailers are working on plans to fill the vacuum left by the bankruptcy and liquidation of Toys “R” Us in the United States and Britain, Canadian toy maker Spin Master said Wednesday.

Both existing toy retailers and new players are fighting hard to gain the bankrupt toy retailer’s 12 per cent market share in the U.S., Ben Gadbois, Spin Master’s global president and chief operating officer, said during a conference call.

The Toronto-based company, a supplier to Toys “R” Us, incurred a US$15.2 million bad debt expense in the first quarter, after determining that it is unlikely to recover anything from the retailer’s liquidation.

“There’s a lot of non-traditional players that are very eager to also enter the toy category sales, just because they see that now as a tremendous opportunity for them,” Gadbois told analysts on the call Wednesday.

The company believes up to 90 per cent of the retailer’s sales will be absorbed by other retailers later this year, but expects the American industry will face about a two per cent hit.

The closing of Toys “R” Us stores in the United States and Britain will end an important sales venue for toy manufacturers.

Spin Master took steps after the retailer’s weak Christmas holiday performance to protect its exposure ahead of an anticipated restructuring. But the extent of the weakness wasn’t fully known and the decision by lenders to immediately liquidate all U.S. stores came as a surprise, CFO Mark Segal added.

Spin Master, which makes popular toy brands such as Hatchimals and Paw Patrol, expects its second quarter will be challenging as the biggest impact of the retailer’s liquidation is felt, and because traditional Easter sales were shifted this year to the first quarter.

It expects toys will sell quickly during the Toys “R” Us liquidation that will be completed by the end of July, paving the way for the retail landscape to normalize in 2019.

“Overall, we feel confident that Spin Master will weather the storm well in 2018 and we see some merger and acquisition opportunities arising out of this situation,” Gadbois said.

However, Spin Master reduced its guidance for organic sales to grow by about five per cent, down from higher-single digits forecast in March because of uncertainty over the aftermath of Toys “R” Us closures.

He added that Toys “R” Us travails will support existing growth of e-commerce.

Spin Master said its plans this year include the launch of almost 200 new Hatchimals collectibles, a toy whose sales nearly doubled in the first quarter.

It also plans to relaunch the Bakugan toy and television show next year, more than a decade after it became a global hit for the company. In April, the company launched a lawsuit against U.S. rival Mattel, Inc. to defend its rights to a patented mechanism used in the Bakugan transforming robots.

Spin Master co-chief executive Ronnen Harary said the sad demise of the toy retailer in the U.S. and the U.K. is not a sign of weakness in the toy industry or retail in general.

“We are pleased to see that many of Toys “R” Us operations around the world have been sold or in the process of being sold and will continue to operate, including Toys “R” Us Canada,” he said.

Canadian Toys “R” Us locations were bought by Fairfax Financial Holdings Ltd., which was the sole bidder in the auction process, offering $300 million.

Spin Master reported late Tuesday that its net income fell nearly 14 per cent to US$8.7 million or nine cents per share in the first quarter of its 2018 fiscal year.

Adjusted net income was US$22 million, or 22 cents a share for the quarter, compared with US$13.6 million or 13 cents a share for the same quarter the previous year.

The first-quarter profit beat analysts’ estimates of 15 cents per share, according to data compiled by Thomson Reuters Eikon.

Revenue for the quarter ended March 31 increased 25.5 per cent to US$285.7 million.

The company’s shares closed 7.3 per cent higher at $53.57 in afternoon trading on the Toronto Stock Exchange.

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