Weak Toys“R”Us Holiday Sales, Bad for Toy Companies and Video Games

Investing

Published: January 10, 2013 5:23 pm

Last Updated: January 11, 2013 5:33 am

Toys“R”Us may no longer be a public company, but that does not mean that it is not an important barometer for toy companies. The company was acquired in a deal in 2005 for $6.6 billion, with buyers being Kohlberg Kravis Roberts & Co. (NYSE: KKR), Bain Capital and Vornado Realty Trust (NYSE: VNO).

The company’s December sales update is going to be pressuring the toy companies. Late on Thursday came a report that its domestic same-store sales were down in December by about 1.8% due to weak demand in the entertainment category of toys. That category includes electronics and video games.

Should that be a shock about weak video game sales? GameStop Corp. (NYSE: GME) just recently warned of weaker than expected sales and earnings due to slow store traffic over the holidays. One area that was slated as strong was the learning toy category it had the strongest performance in United States.

Internationally the results were worse with a 3.5% drop, blamed mostly on Europe and Japan. As you might expect, the CEO also said that an uncertain economic environment (perhaps around the fiscal cliff?) hurt results in the US and abroad.

November only added to the woes. Superstorm Sandy also attributed to the weakness in November making the total quarterly drop by 4.5% in the United States and by 5.6% internationally.

While Toys“R”Us said that the learning segment sales were strong, shares of Leapfrog Enterprises Inc. (NYSE: LF) are indicated lower after closing up almost 1% today at $9.38. Shares of Mattel Inc. (NASDAQ: MAT) closed up 0.5% at $37.00 and Hasbro Inc. (NASDAQ: HAS) rose by almost 4% on Thursday, but both stocks are indicated down by almost 1% in the after-hours.

What is interesting is that when you add up the sales at Toys R Us with the sales of Target Corporation (NYSE: TGT) and Wal-Mart Stores Inc. (NYSE: WMT) you end up with roughly 2/3 of the annual toy sales for most of the top toy manufacturers. Amazon.com Inc. (NASDAQ: AMZN) continues to be a thorn in the toy segment as well, but that is becoming the case in almost all retail segments.

The end game of this is simple. Parents had to say, “Sorry there Johnny. The guys in charge in Washington D.C. made us too uncomfortable to buy your toys.” Toys“R”Us was supposed to come public in 2012 but that was derailed due to the endless uncertainty that faced the economy throughout 2012. If today’s news is a barometer, then the company may have to remain in the hands of private equity for far longer.

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