TOY FAIR 2016
sales were 28.6 million Danish krone. Assuming a strong second half, I believe the company will post sales of more than 34.2 million krone. When translated into dollars, I believe that is going to come up short against Mattel’s sales. But I suspect that if we were to translate Lego’s 2015 sales at the exchange rate in effect at the end of 2014, Lego’s sales would be about the same as Mattel’s. Of course, Mattel’s sales have also been hurt by the strong dollar, but the point is that Lego is poised to become the No. 1 company based on sales. And considering its extraordinarily high profit margins, it is highly likely that its market value would be higher if it were a public company. So, my second prediction is that Lego will end 2016 as the world’s largest toy manufacturer as measured by annual sales.
3) Currency Takes a Back Seat Currency has been a pretty big factor for just about any company making products in U.S. dollars (or the Chinese yuan, which didn’t move much against the dollar) and selling in currencies that have weakened. The euro’s slide began in earnest in late 2014 and picked up steam in 2015, and was joined by other emerging market currencies to make 2015 the toughest year in decades for U.S. companies selling abroad. But at this point, this is old news. My third prediction for 2016 is that by mid-year, the year-over-year comparisons of the U.S. dollar against the euro and the British pound are likely to be fairly modest, and that by the holiday season, currency will no longer be a major factor (or excuse) in the results of most major companies.
4) Commodity Prices Matter My fourth prediction is that commodity prices, often the flip side of currencies, are likely to provide a significant benefit in 2016. Oil remains low, as do most other commodities, and companies that contract with factories in China are likely to benefit from the lower commodity prices (and the lower value of the yuan), even if the only benefit
“In theory, the sharp drop in gas prices should have put so much more money in consumers’ pockets that spending would rise and lead to a stronger recovery. It hasn’t happened yet, and I am reluctant to predict it will happen in 2016, despite the continued low prices for gas.” is to offset the effect of higher wage rates in China. One of the surprises of the recent low oil price environment is that lower gasoline prices have not provided as big a lift to consumer spending as I and many economists had predicted. In theory, the sharp drop in gas prices should have put so much more money in consumers’ pockets that spending would rise and lead to a stronger recovery. It hasn’t happened yet, and I am reluctant to predict it will happen in 2016, despite the continued low prices for gas.
5) Production Costs Fall My fifth prediction relates to the last two—currency and the impact o n production costs. The Chinese government continues its experimentation with allowing market forces to drive the rate of exchange between the yuan and other major currencies, and the result has been the opposite of what “experts” predicted for a long time: The yuan is dropping. The conventional wisdom was that the Chinese government was artificially depressing the value of the yuan, and that if it floated freely, it would rise sharply, eroding China’s competitive position in the global manufacturing web. However, the value continues to drop as China has eased off the strict control of the rates. This, in turn, reduces the cost for foreign companies manufacturing goods in China. (In all likelihood, the government knew the rate would fall because of its own weak economy, and allowed this to happen
precisely because it would improve the benefit of manufacturing in China. If its economy rebounds strongly, I would not be surprised to see exchange rate controls return.) But before toy makers go and spend the windfall this might have been expected to produce, recall that labor rates continue to rise, and that, in fact, the very same forces inducing the government to allow the yuan to fall (i.e., a desire to stave off social unrest that would result from falling incomes among workers) are driving minimum wage increases.
6) Star Wars Maintains Momentum—This Year My sixth and final prediction has to do with a couple of key licensed properties: Star Wars and Disney Princess. Star Wars sales are up huge year-over-year, driven by the phenomenal success of Star Wars: The Force Awakens, and we believe the year-over-year increases will remain quite solid in the fourth quarter, when the new Star Wars: Rogue One has to repeat the record-breaking performance of The Force Awakens. I predict that the year-over-year growth will be much more difficult from December 2016 forward. Episode 8 is expected in December 2017, which could help, but that will be comping against sales of Episode 7 products, so the growth is likely to moderate. As for Disney Princess, I think the industry is going to see that the decline in sales of Frozen merchandise may not lift sales of other Disney Princess products quite as much as the rise of Frozen cut into sales of other Disney Princess products. I wish all readers a successful Toy Fair and a very prosperous 2016. »
Sean McGowan is a managing director in the equity research department of Oppenheimer & Co., a New York-based investment bank. He has been covering toy stocks since 1986, and has covered video games, juvenile products, sporting goods, and consumer electronics.
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