toys

Toy Retailers

Industry Insight

Date January 2017

Approximate net recovery on cost

Synopsis

Current Trends

  • The NPD Group’s Retail Tracking Service, which represents approximately 80 percent of the U.S. toy retail market, reported a 5 percent increase in domestic toy sales in 2016
  • The rise in ecommerce poses a significant threat to the industry, especially from Amazon. In turn, numerous toy retailers are stepping up their online presences to compete
  • Overall, U.S. personal consumption expenditures on toys, dolls, and games are forecasted to grow at an annual compounded rate of 4 percent between 2016 and 2020

 

Projected Values

 

Growing and Declining Categories 

 

Mixed Results for Holiday 2016: While select retailers lagged behind, overall 2016 holiday sales looked consistent with industry projections. As reported by Chain Store Age, First Data’s retail spending figures increased 3.6 percent during the holiday period, which was in line with the National Retail Federation’s forecast. The biggest winner was ecommerce, which saw 2016 sales increase 12 percent along with a 21.3 percent share of all holiday spending.
 

For toy retailers, results were mixed. At Target, the toy department outperformed expectations during the holidays, growing 3 percent more than the company average. However, Toys ‘R’ Us, Inc. reported a same store sales decrease of 2.5 percent domestically and 4.9 percent internationally, for a consolidated 3.4 percent decrease for the nine-week period ended December 31, 2016. The decline was driven in part by lower than expected sales in the toy category overall and continued softness in its baby business.
 

Several major toy retailers were plagued by both fulfillment and performance issues from the season’s hottest toy, Hatchimals, a furry toy creature that “hatches” from a toy egg in about 30 minutes when kids knock, tap, or rub on the shell. Spin Master, the company that makes Hatchimals, received an overwhelming number of complaints, many via social media, about the $50 toy failing to “hatch” as promised. Fulfillment issues also caused the price of the toy to skyrocket to up to $250 in alternative markets like eBay.
 

Spin Master wasn’t the only company inundated with complaints during the holiday season. Mattel’s Barbie Hello Dreamhouse, an app- and voice-controlled version of the classic Barbie Dreamhouse, also faced backlash from consumers as many parents reported receiving “error code” messages when trying to use the toy. For brick and mortar toy retailers counting on successful holiday sell-throughs with limited returns, issues with a major product or brand have the potential to negatively impact sales for an entire season.
 

Despite Losing Ground, Seasonality Remains a Key Driver of Value: Recent trends have shown that the traditional holiday shopping season is losing ground as a percentage of total annual sales. U.S. News recently reported that November and December now account for less than 21 percent of annual retail sales at physical stores, down from a peak of over 25 percent, and experts believe it may drop further. The Retail Economist notes that the traditional holiday season steadily gained in importance and peaked in the early ‘80s, before the dominance of big discounters like Walmart stalled its growth as shoppers began moving away from department stores. Nevertheless, the two-month period remained strong through the mid-‘90s when online shopping began to gain market share. In general, many consumers are now shopping for the holidays year-round. Heavy discounting has diluted traditional period sales. With significant promotions offered throughout the year, shoppers no longer wait until November or December to purchase.
 

Despite these changes in consumer buying trends, seasonality remains an important consideration for appraisals. With a significant percentage of total annual revenue still generated in the months of November and December, clients lending on toy inventory should understand the impact of seasonal values on their collateral. Seasonality coupled with the obsolescence risk related to often fickle consumer purchasing trends in individual categories are primary drivers of gross recovery values for toys. Inventory mix drives changes in gross recovery as higher recovering categories, such as licensed action figures, games, and bicycles, must be managed in conjunction with lower recovering categories including plush and seasonal toys. Miscalculations in purchasing, supply chain shortages in popular items, or vendor fulfillment issues can quickly derail a retailer’s holiday season sales momentum, resulting in stock-to-sales ratio imbalances by category that can impact sales capacity for months. In turn, normal course overstock and sales capacity issues may severely impact appraisal sell-throughs by category, and overall sales capacity, ultimately taking a toll on already highly seasonal Net Orderly Liquidation Values.
 

Retailers stocking deep assortments of toys must carefully manage inventory levels to sales volumes to maximize value, especially given the brevity of the “traditional” holiday season and its potential impact on annual sales. To the extent that seasonal or slower moving inventory is not managed effectively as part of the normal course of business, it may become challenging to sell-through in an off-season liquidation event, resulting in lower gross recovery values in certain categories. Gordon Brothers recommends that lenders partner with appraisers in requesting annual seasonal models to address large swings in net recovery values and their potential impact on availability.