Toymaker earnings: Will Toys ‘R’ Us liquidation continue to squeeze Hasbro and Mattel?

Toy giants Hasbro Inc. and Mattel Inc. are facing a number of headwinds when they report second-quarter earnings, scheduled for July 23 and July 25 respectively.

Stifel analysts are expecting a down quarter for Hasbro HAS, -0.29% with the company continuing to feel the pain of the Toys ‘R’ Us liquidation, surplus inventory in Europe and tough comparisons for the company’s franchise brands, which include Monopoly and Nerf.

“Looking ahead, we assume a return to more normalized growth rates in ‘19, but also see potential headwinds emerging (i.e. input cost inflation),” analysts wrote in a note.

Stifel rates Hasbro shares at hold with a $94 price target.

Mattel MAT, -1.74% which was downgraded twice in June by UBS and D.A. Davidson, could also face challenges caused by the closure.

“Mattel has a hard 2Q17 comparison due to the ‘Cars 3’ channel fill, and with the expected disruption and light shipments caused by the Toys ‘R’ Us liquidation,” D.A. Davidson analysts said.

D.A. Davidson lowered its stock rating to underperform from neutral. Analysts have a 12-to-18 month price target of $12 on the stock, equal to about a 25% decline from its current level.

In a contrasting view, MKM analysts said about Hasbro that the Toys ‘R’ Us headwind “is now finished,” but there are other challenges to be mindful of: “the shifting European retail landscape, rising transportation costs and higher oil prices.

“These issues keep us from becoming more constructive toward 2019 as Hasbro should benefit from ‘Frozen 2,’ ‘Star Wars: Episode 9’ and the expected rollout of ‘Magic: The Gathering Arena,’” analysts wrote.

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The second quarter will reflect the pressure of “weak performance” for toys related to “Solo: A Star Wars Story,” which was a disappointment for Walt Disney Co.DIS, +0.47% 

MKM rates Hasbro shares at neutral with a $92 price target.

The 17 analysts polled by FactSet have an average rating of overweight on Hasbro stock with an average price target of $98.13.

Sixteen FactSet analysts have an average hold rating on Mattel stock and an average target price of $16.54.

Here’s what to expect:

Earnings: Hasbro is expected to report earnings of 30 cents per share according to FactSet, down from 53 cents last year.

Estimize, which crowdsources estimates from sell-side and buy-side analysts, hedge-fund managers, executives, academics and others, expects per-share earnings of 28 cents.

FactSet analysts expect Mattel to report a loss of 30 cents per share after a loss of 14 cents last year.

Estimize expects a loss of 39 cents per share.

Also: Where to buy your toys now that Toys ‘R’ Us is gone

Revenue: FactSet expects Hasbro to report revenue of $844.7 million, down from $972.5 million year-over-year. Estimize expects revenue of $830.0 million.

FactSet expects Mattel to revenue of $847.8 million, down from 974.5 million last year. Estimize expects revenue of $865.2 million.

Stock price: Hasbro shares are up 2.8% for the year so far, while Mattel stock is up 4.8% for the period. The S&P 500 index SPX, +0.19% has gained 5.2% for 2018 to date.

Other issues:

-“Although we believe [Mattel] continues to make positive strides with its cost-cutting initiatives we believe the Toys ‘R’ Us liquidation and retailers maintaining tight inventory levels weighed on 2Q performance and is causing us to lower our projections,” MKM analyst Eric Handler wrote in a Mattel note.

“In our view, any meaningful increase in Mattel’s share price will be a result of an improved top line outlook. Right now, we believe getting to management’s goal of flat revenue for 2018 appears overly optimistic.”

MKM rates Mattel shares neutral with a $16 price target.

– D.A. Davidson says Mattel’s fundamentals haven’t improved even though the stock price has rallied, up 16.2% for the last three months.

Prices for plastic resin, which account for 10% to 15% of cost of goods sold (COGS), are also up, which hurt margins in the first quarter.

-UBS agreed that stagnant fundamentals are a challenge for Mattel, but took a more bullish outlook.

“While our fundamental thesis on top-line recovery has taken longer than expected with now added risks of an untested management team and levered balance sheet, we continue to believe Mattel remains owner of the most concentrated evergreen portfolio of toy brands,” analysts wrote.

Mattel announced in April that Ynon Kreiz would replace Margo Georgiadis as chief executive, effective April 26. Mattel brands include Barbie, Disney Toy Story and Cars, and Hot Wheels.

“Despite market concerns of secular declines, (the) toy industry remains a growth industry,” wrote UBS analysts led by Arpine Kocharyan. “Because there is no evidence of industry structural declines, we think Mattel’s market share losses have largely been self-inflicted.”

UBS downgraded Mattel shares from neutral to buy with a price target of $18.

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