The Toy Book - 2016 NY TOY FAIR EDITION

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.
TOYBOOK.COM | FEBRUARY 2016 | THE TOY BOOK 61