Toy and family entertainment franchise owner Mattel (MAT:NYSE) has dubbed 2023 The Year of the Doll ahead of the 21 July release of a big blockbuster Barbie movie starring Hollywood favourites Ryan Gosling and Margot Robbie.

The Oscar winning actor coproduced the film with Warner Bros Discovery (WBD:NYSE) under her company LuckyChap Entertainment, alongside husband Ton Ackerley and producer Josey McNamara.

Created in 1959, Barbie debuted at a New York Doll fair initially selling 300,000 dolls. Since launch more than one billion Barbie dolls have been sold worldwide with sales reaching 58 million units in 2022.

The upcoming film is an opportunity for Mattel to monetise the IP (Intellectual property) from one of its most successful brands and build on Barbie’s appeal by introducing her to a new generation and re-engaging with doll collectors and parents.

INSPIRED BY BARBIE

After seeing the early success of Barbie, Hasbro’s (HAS:NASDAQ) head of marketing persuaded the company to buy inventor Sam Weston’s idea of a military figure which turned into G.I. Joe and the start of the action figure genre.

Hasbro subsequently created one of the best-selling toys of all time in the action genre after releasing The Transformers toy line and cartoon series in the early 1980s.

This year is also a pivotal year for Hasbro which sees the release of Transformers: Rise of the Beasts on 9 June in the UK.

CEO Chris Cocks told investors at a JP Morgan Global Technology, Media, and Communications conference (22 May) that he expects the movie to be one of the top five releases of 2023 amid the most exciting film and TV slates he has seen for years.

Over the course of the year the company expects to see the release of seven or eight films and around 20 TV shows highlighting both Hasbro’s and Walt Disney (DIS:NYSE) IP.

MATTEL IN A NUTSHELL

The business began in a garage in 1945 as a collaboration between Ruth and Elliot Handler, and Harold ‘Matt’ Matson. The focus from the get-go was creativity and innovation.

The company has since built a portfolio of iconic brands including Barbie, Hot Wheels, Fisher Price, Masters of the Universe, Monster High and MEGA.

In addition to owning brands, Mattel licenses intellectual properties in partnership with global entertainment companies such as Walt Disney and Netflix (NFLX:NASDAQ).

The company’s thesis is to grow the IP driven toy business and capture its value across adjacent business areas of such as consumer products, digital gaming, location-based gaming and content through film and TV.

Mattel adopts a capital light approach to the theatrical side of the business by licensing its IP and taking participation in box office sales and profits without contributing any physical capital.

The firm diversifies single project risk by working with all the film studios and it currently has 14 films in development.

It is also worth noting the company has a huge back catalogue to exploit as well. Next year Mattel is bringing back the popular Barney the purple dinosaur franchise in a relaunch through a new animated TV series.

Beyond the depth of its IP CEO Anthony DiSilvestro said the business possesses a competitive cost advantage due to its capabilities in making fashion dolls and die-cast cars.

WHAT TO EXPECT FOR 2023

The toy industry has been working through excess inventories built up during 2022, but underlying end customer demand remains positive. DiSilvestro argues the toy business is a growth industry which has sustainable drivers.

His view is that parents prioritise spending on their children’s education and play which tends to be sticky during economic downturns. The industry is around a fifth bigger than before the pandemic, notes DiSilvestro.

Retail destocking of excess inventories is expected to wipe between 3% and 4% from full year sales which means reported sales are likely to be flat at around $5.47 billion.

On a brighter note, Mattel is guiding for gross margins to increase to 47% from 45.9% while cost saving measures and lower input cost inflation will boost operating margins.

Full year EPS (earnings per share) is expected to be $1.10 to $1.20 while analysts have pencilled in 26% growth in 2024 EPS to $1.49 which puts the shares on a one-year forward PE ratio of 12.1 times.

The company expects to generate more than $400 million of free cash flow in 2023. One of the intended uses of the cash is to buy back shares, the first time in over a decade the company has embarked on a share repurchase programme.

HASBRO IN A NUTSHELL

Hasbro is a diversified play and entertainment company which has developed rich IP based on brands which engage with fans from an early age right the way through in maturity and adulthood.

Hasbro’s icon brand portfolio includes Magic: The Gathering, D&D (Dungeons & Dragons), Hasbro gaming (Monopoly), Nerf, (outdoor) Transformers, Play Doh and Peppa Pig as well as premier partner brands.

After completing a strategic review on becoming CEO 15 months ago Chris Cocks has identified a set of priorities which are aimed at playing to Hasbro’s strengths.

Thematically the strategy revolves around the activity of ‘play’ which is a core strength of the business whether in relation to pre-schoolers, teenagers, or adults.

The idea is to focus on fewer, bigger brands and become the number one or two player in each segment. One considerable success area for Hasbro is gaming which generates $2 billion of revenue a year.

Improving operational performance is another key goal and the company has targeted $200 million to $250 million in cost savings over the next three years. Hasbro is on track to reach $150 million of savings in 2023.

The refresh of the business and its strategy is intended to increase profitability and lead to faster organic growth. If successful Cocks reckons operating profit could grow at 9% to 10% over the next few years.

The structure of the group will also morph from the current three business units to two. Part of this is related to asset sales in Entertainment as non-Hasbro related IP TV content is sold.

This could save between $600 million and $700 million of content investment.

HASBRO’S POWER BRANDS

Magic: The Gathering is Hasbro’s first billion-dollar brand and one of the leading trading card and strategy games in the world. Monopoly is a leading board game which is undergoing a digital initiative with Monopoly-go.

Dungeons & Dragons is one of the leading role-playing games in the world. A successful movie based on the IP, Dungeons & Dragons: Honour among Thieves, was released in March and there is also a TV series in development and a series of related video games.

In toys the fastest growing franchise is in the preschool segment which features Peppa Pig which joined the Hasbro stable after it purchased Entertainment One.

A Disney partnered animated series, Star Wars: Young Jedi Adventures, is expected to be successful in the pre-school segment.

In the creativity segment Play Doh is the anchor franchise while in outdoor Nerf is one of the most successful brands in the blaster category.

The last category but one of the most important for Hasbro is action figures which it invented in the 1960s with G.I. Joe. Cocks expects the category to be one of the most important for Hasbro’s success going forward.

COLLABORATION WITH COMPETITORS?

It might sound like a silly question because consumers have limited spending power, so where they spend matters. But it might be surprising to learn that the popular toy makers often collaborate.

Cocks said he views Mattel not as a direct competitor but as another IP holder with complementary categories. It therefore makes sense to see Mattel like other IP partners such as Walt Disney.

For instance, he expects a Barbie themed Monopoly game to be one of its best-selling units on the back of the upcoming movie release.

Earlier this year Hasbro announced a relationship agreement with private company Lego around its Transformers and D&D franchises.

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