What the Toys R Us Closing Means for Mattel, Hasbro

Toys 'R' Us, or TRU, recently announced its liquidation in the U.S., and we’ve taken steps to adjust our 2018 top- and bottom-line estimates for

Furthermore, we’re reducing our Hasbro fair value estimate by $3, to $97, as we now expect first-half sales could fall around 4% in response to a TRU liquidation (versus a low-single-digit increase expected previously) and incorporate the incremental hit to gross margin, SD&A, and advertising we think will prove necessary (taking operating margins down 100 basis points year over year to 8.8% during the half). For Mattel, we had already modeled modest sales declines (down 1%) over the first half of fiscal 2018, and our updated outlook includes sales that fall by a mid-single-digit clip. Corresponding expense deleverage in gross margin, advertising, and S&A also weighs on performance (taking first-half operating margin to negative 12% from negative 9.5% last year), knocking $1.00 off of our fair value estimate, now at $21.50. We anticipate Mattel and Hasbro could be through the worst part of TRU’s wind down by the third quarter, when we expect more normalized (very low-single digit) demand to resume. While shares of both strike us as undervalued, we believe near-term headline risk surrounding the TRU potential liquidation could continue to weigh on shares over the next several months.

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