MINNEAPOLIS, Nov. 17 /PRNewswire-FirstCall/ -- The $21 billion U.S. toy
industry is the largest toy market in the world. It is a mature industry at a
crossroads, looking for ways to grow. Since 2002, the industry has been
experiencing sales declines. Given these facts, what will this holiday season
bring for the toy industry? What will be the key areas of growth? Will the
video game sector continue to gain popularity? U.S. Bancorp Piper Jaffray
Senior Leisure and Entertainment Analyst Tony Gikas answers these questions
and much more in a recently published in-depth report titled, Toy & Video Game
Industry Primer. The report is divided into four chapters: Traditional Toy
Overview, Toy Industry Trends, Investing in Toy Stocks and The Video Game
Traditional Toy Overview:
The United States toy market constitutes approximately 37 percent of
worldwide retail toy sales, based on the most recent data from the NPD Group
Worldwide. Gikas reports that the $21 billion domestic toy industry stands at
a crossroads as overall growth continues to slow. According to the NPD Group,
retail toy sales actually declined two percent in 2002 to $20.2 billion. The
industry has essentially matured, product quality is below average and
economic conditions have softened. Sales of traditional toys have decreased
four percent year-to-date through the month of September.
"Overall we anticipate toy sales in 2003 will increase approximately two
percent to $20.8 billion," said Gikas. "Our estimate assumes an increase in
consumer confidence and spending, a strong product lineup, improving retail
backdrop and a stable geopolitical outlook."
Toy Industry Trends:
A big trend in the industry is the large mass merchant retailers capturing
market volume through aggressive advertising and competitive pricing, taking
share from small and specialty retailers. Currently, Wal-Mart (WMT, $55, #=),
Toys "R" Us (TOY, $12.74, #=) and Target (TGT, $38.64, #>=) account for 50
percent of domestic retail toy sales. "As more and more toy dollars are spent
in mass merchant stores, these retailers continue to garner additional power
with vendors, increasing the importance of key retail relationships," said
A key factor impacting toy sales is the size of the addressable market.
According to Gikas, demographic trends have stabilized and turned upward.
According to the 2000 census, the United States has approximately 59 million
children under the age of 15 years. The overall population trends for U.S.
children have stabilized since the mid-1990s following five-plus years of
rapid growth in the birth rate. Children aged 12-13 years old today, born in
the early 1990s mini baby boom, have largely grown beyond their peak
traditional toy playing years and are now more interested in sports and other
forms of entertainment, including video games. On the other hand, a positive
factor influencing toy sales is the large and affluent baby boomer population,
which is entering grandparenthood and as a result beginning to drive
additional demand as it purchases toys for its grandchildren.
Investing in Toy Stocks:
Gikas believes toy stock fundamentals are better than they have been in
many years as improved balance sheets, streamlined product portfolios and
reduced costs have left the companies lean and in a position to be aggressive
after years of acquisitions and redundant infrastructure. "The prospect of an
improving economy, coupled with improving fundamentals, makes toy stocks more
attractive in the current period than they have been during the last five
years. Generally speaking, we suggest investors increase their toy exposure
late in the calendar year (November-December) and reduce exposure moving into
the second half of the year."
In the report, Gikas talks about the challenging retail environment that
exists, including challenges from competition, age compression and less
favorable demographics that continue to weigh on the overall category.
"Considering the leading toy product lines look much improved, we estimate
domestic toy sales will grow near 1-2 percent during 2003," said Gikas. "In
general, we expect that the larger toy manufacturers like Hasbro (HAS, $22.19,
#>), Mattel (MAT, $19.38, #=) and LeapFrog (LF, $34.35, #>) will take share at
the expense of small manufacturers in unfavorable categories."
Overall, Gikas points out that historically, toy stocks exhibit a
significant amount of seasonality and are most attractive at the end of the
calendar year as anxious investors reduce exposure prior to earnings releases.
"The seasonality of toy stocks reflects out-performance during the first half
of the calendar year and underperformance during the second half of the
calendar year relative to the overall market," said Gikas.
The Video Game Industry:
Extensive debate exists as to which stage of the video game cycle the
market is currently experiencing. "We believe spring 2003 marked the midpoint
of the current video game cycle, in terms of the product life cycle of current
generation video game hardware," said Gikas. "We anticipate the next
generation of video game hardware will be introduced in autumn 2006, depending
upon the competitive positioning of the video game console manufacturers and
existing demand for current generation products."
"In addition, we expect 2003 will be the peak year for unit sales of
current generation hardware sales. We are forecasting that 22.3 million
hardware units will be sold in North America in 2003, a modest increase from
21.1 million units in 2002 and will subsequently decline in 2004 to sales of
20.3 million units as the installed base of video game hardware becomes
To receive a copy of Toy & Video Game Industry Primer, clients and members
of the media should contact Susan Beatty at firstname.lastname@example.org or
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