Spin Master hit some bumps in the third quarter for what’s been a rollercoaster sales year for the Toronto-based toy and entertainment company.
The Q3 numbers reflect an overall sales decrease of 11.4% to $583.3 million in the third quarter this year, down from $658.2 million during the same period last year. The biggest drop came in North America, which fell 23.4%, followed by a 3.2% decline in Europe, and a 6.3% drop in the rest of the world. Gross profit decreased 27.6%, and overall gross revenue fell to $239 million, a decrease of 16.3% from $285.7 million last year. Revenue decreased 11.6% to $548.1 million versus $620 million last year.
The disappointing third quarter results follow a strong second quarter that reflected growth in several areas. The company says that it’s already bounced back with strong October sales and shipments that have already made up the $100 million (8%) decline in product shipped for Q3. Additionally, there’s brightness on the horizon with new product launches for 2020 and beyond.
“We have made solid strides in executing our long-term growth strategies,” says Ronnen Harary, Spin Master’s chairman and co-CEO. “While our performance in the third quarter was negatively affected by several challenges, we do not believe it is indicative of our expected full-year 2019 performance nor our long-term growth and value creation prospects. We believe Spin Master’s diversified portfolio of brands and franchises, driven by our relentless focus on innovation and storytelling, is strong and healthy and the power of our international platform as well as our ability to capture the hearts and minds of kids with engaging multiplatform entertainment and digital content, will continue to drive long term profitable growth.”
Echoing the challenges faced by Hasbro as reported in its Q3 earnings, Spin Master felt the squeeze from the fluctuating tariff situation in the U.S. Supply chain cost has increased due to shipping and warehousing changes.
“Our decision to manage our brands more tightly using domestic replenishment and an evolving retailer trend away from direct import orders towards domestic orders shifted shipments from the third quarter to the fourth quarter,” says Ben Gadbois, Spin Master’s president and COO. “In addition, increased inventory levels arising from our decision to bring in inventory earlier to mitigate U.S. tariffs, together with short term disruption caused by our U.S. East Coast warehouse consolidation, created congestion in our U.S. supply chain. This resulted in a significant shift of both shipments and orders from the third quarter to the fourth quarter. We are pleased with the progress we have made in October, with both orders and shipments off to a strong start. We remain on track to deliver top-line growth for the full year.”
Consolidation and Lessons Learned
On the call with investors and analysts, Spin Master leadership points to a multitude of logistics lessons learned as it accelerated its Asia diversification strategy and an emphasis on domestic shipping versus FOB (free on board). The company consolidated four distribution centers (DC) to one central DC on the East Coast, and it also closed its GUND and Swimways offices and opened a gaming office on Long Island. Domestic replenishment helps to ensure fresh assortments of products at retail, particularly on collectibles lines that have repeat business. October was the highest domestic shipment month in the history of the company, and it expects that November will break the record again.
Additionally, the company says that it believes Q3/Q4 numbers for last year have been skewed by “the race to fill the Toys ‘R’ Us void in the U.S.,” when players such as Party City increased space allocated to toys, which resulted in higher shipments, but not necessarily higher sales. Some of the companies that took a swing have since scaled back for this year. In Party City’s case, the retailer opened around 50 Toy City locations last year that didn’t re-open for business this year.
Bright Spots and Growth
The overall outlook for Spin Master is to continue focusing on new products and diversity. While big drops were felt across categories, such as R/C and interactive characters (which fell 51.5%), boys action and high-tech construction rose 188%. Hatchimals sales were down more than 60%, but the recent release of Hatchimals Wow and upcoming holiday promotions are bringing new excitement to the brand.
Strong numbers are being reported across fresh assortments from DreamWorks Dragons, Bakugan, Monster Jam, PAW Patrol, and Cool-branded products, along with new product launches, including Owleez, Juno, Awesome Bloss-ems, and others. Monster Jam, in particular, is seeing strong international response in Australia and Mexico.
Streaming and overall content viewership from Spin Master’s entertainment properties, along with digital subscriptions from owned properties such as Toca Boca and Sago Mini are growing.
The biggest looming launch cited several times on the call is the 2020 debut of Spin Master’s DC Comics-inspired collection. The company holds the license for action figures, RC, and water toys. Expect to see a formal debut at Toy Fair New York.
Spin Master’s Q4 and full-year earnings will be reported in March.