Lex (FT) on The crunch stole Christmas

The crunch stole Christmas

Published: October 20 2008 15:04 | Last updated: October 20 2008 20:55

If investors are to be believed, Santa’s sack will be light this year. Share prices of Mattel and Hasbro, the two big US toymakers, have fallen by a third since August. Third-quarter numbers released on Monday from both manufacturers prompted downgrades to earnings expectations in spite of solid sets of topline growth. Has Christmas been cancelled?

Some caution is natural. After 15 years of declining prices for toys, 2006 and 2007 were notable for rises in average product prices. New mechanisation and computerisation techniques had allowed the creation of must-have robotic playthings, handing their manufacturers a rare degree of pricing power. Yet with consumers retrenching from all discretionary spending, it is hard to see too many parents forking out for Hasbro’s $180 FurReal Friends Biscuit animatronic puppy, or Mattel’s $60 Elmo dolls.

Christmas is always a nervy time. Shares in the toymakers tend to perform best in the first half of the year, when the fourth quarter turns out not to have been so bad as feared, and the following year’s line-up starts to prompt excitement. Toys have historically proved relatively recession proof, thanks to parents’ perennial desire to see happy faces on Christmas morning. More than half of Hasbro’s products sell for less than $20; more than three-quarters of Mattel’s for less than $25. Retailers know the pull of toys and discount hard-to-lure customers – Wal-Mart has announced a top 10 for $10 deal.

Currency headwinds lie in wait next year, and ambitions to make mid-teen margins are likely to stay long-term goals for now. But demographics, international growth and well established brands remain on the toymakers’ side, suggesting a future of steady, if unexciting growth. With Mattel now trading on a lowly 10 times prospective earnings, the spirit of Scrooge may have gone too far.