Sorry Santa, Kids Don't Want 'Toys' This Christmas

Children's toys
Children's toys

Here's a grim statistic: The nominal amount of money being spent on traditional toys and games in the country -- per person -- has fallen from $85 to $60 since 1998.

Thus reports Goldman Sachs analyst Michael Kelter who is downgrading shares of Hasbro (HAS) to a Sell rating and also lowering his profit estimates for industry leader Mattel (MAT).

The state of traditional playthings is grim. While a 30% plunge over such a long time may not have been as easily discernible on a year-by-year basis, Kelter's report indicates that the pace of these declines is now accelerating.

Things can get even hairier this holiday shopping season.

Small Things with Big Price Tags

Hasbro is the company behind Parker Brothers board games, soft Nerf playthings, and sturdy Playskool products for infants and toddlers. This is also the company behind Transformers, Furby, and G.I. Joe.

Consumers naturally have sentimental bonds with some of the company's products. Maybe it was the Monopoly game that turned into an all-nighter or the time that your dad lied about where his aircraft carrier was so you could beat him in Battleship.

Today's kids don't see it that way. Skim over holiday wish lists and you'll find requests for iPads, iPods, and other portable gadgetry that can stream media and play free or nearly free apps.

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Even Toys "R" Us is getting in on the trend. It just started rolling out an economically priced tablet -- the $150 Tabeo -- and naturally it's going to be promoted at its stores. It comes preloaded with dozens of games and learning apps, and parental controls are in place to allow them to limit what their kids can do with the devices.

Yes, $150 is a lot of money, but it's also less than a third of what Apple's (AAPL) new iPad costs. LeapFrog (LF) -- a company that has been blending kid-friendly education with electronics for years -- has tablet-like devices starting at $80.

Life After Shia LaBeouf

Hasbro had a good run a couple of years ago when it began dusting off its toy franchises as theatrical properties. "Transformers" was a big winner, spawning three box office hits, but "G.I. Joe" didn't do nearly as well and "Battleship" was a sinker and a stinker.

Where will Hasbro go from here? If Battleship was a reach, you don't want to see the well get any drier with "Sorry: The Movie" or whatever loosely connected plots could be conceived out of Operation or Nerf.

Perhaps more importantly for Hasbro's purposes, toy sales of its Transformers playthings failed to keep up with the franchise after the initial uptick.

Hasbro is resorting to odd tactics to get noticed this season. It's teaming up with Zynga (ZNGA) to retrofit some of its classic games with Zynga properties. We're talking about Hungry Hungry Hippo with "FarmVille" cows instead of hippos and a "CityVille"-inspired version of Monopoly. It's also turning to another hot mobile property -- "Angry Birds" -- for updated versions of its Jenga and Nerf product lines.

It doesn't seem as if it will be enough. Analysts see negligible earnings growth on flat sales this year, and these are the same pros that have overestimated Hasbro's earnings power in two of its past four quarters.

The Buck Stops Here

One thing that investors have benefited from at Hasbro is a healthy approach to dividends. The stock currently yields an impressive 3.7%. However, Kelter warns that the toy maker is already paying out 75% of its free cash flow to investors. It may be hard to justify continued increases, especially if earnings growth is peaking.

Kelter isn't the only analyst turning bearish on toys. Needham analyst Sean McGowan downgraded shares of Mattel, Hasbro, and JAKKS Pacific (JAKK) last month.

The negativity is particularly pressing for Hasbro since it seemed to be the darling of its industry a couple of years ago when the Hollywood success of Transformers was breathing new life into a seemingly tired franchise.

The days of turning Hasbro properties into pop culture hits are over. Hasbro won't necessarily fall from here, but its greatest days may be in the rear-view mirror.


Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Hasbro, Apple, LeapFrog Enterprises, and Mattel. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.

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