January 2006

Toy market in U.S. falling for 3rd year, hurting Mattel's Barbie sales; Sales of electronics and communications gadgets for children up 36 percent in 2004 to about US $675 million

U.S. toy sales are headed for their third straight annual decline because children like 6- year-old Dawson Painter prefer electronic games. Painter, a first-grader in Archdale, North Carolina, wants a PlayStation Portable video-game console for Christmas. "He'd rather play that than board games," said his mother, Johanna Painter, who bought one of Sony Corp.'s players at Wal-Mart Stores Inc. for US $250.

The US $20.1 billion market for traditional toys from companies including Mattel Inc., the maker of Barbie dolls and Hot Wheels cars, is eroding as Sony, Microsoft Corp. and Nintendo Co. push electronic gear aimed at youngsters. Game and toy sales may drop 2 percent this year after declines of 3 percent in 2003 and 2004, said Anthony Gikas, a Piper Jaffray & Co. analyst in Minneapolis.

"Electronics is where the big toy companies need to be," said Bob Goldsborough, an analyst at Ariel Capital Management in Chicago, whose US$21 billion in assets include 17.5 million Mattel shares and 16.2 million Hasbro Inc. shares. "It's get with the program or fall behind."

Slumping sales of Barbie dolls contributed to two quarters of declining profit in 2005 at Mattel, the world's largest maker of toys. The El Segundo, California-based company had a loss in another quarter.

Hasbro, the No. 2 toymaker, in March reported its first quarterly loss in almost three years. Third-quarter profit at the Pawtucket, Rhode Island-based company increased 3.8 percent, less than analysts forecast, amid higher costs for fuel and plastic. Mattel's earnings for the latest quarter also missed estimates.

Toy sales declined 5 percent this year through October, according to NPD Group, a researcher based in Port Washington, New York. More than 40 percent of annual sales are generated in November and December.

Thirty-seven percent of consumers bought electronics or computer-related accessories the weekend after Thanksgiving, up from 31 percent in 2004, according to a survey by the National Retail Federation in Washington. A total of 47 percent purchased CDs, DVDs, videos or video games, an increase from 46 percent.

Shoppers buying toys that weekend fell to 33.1 percent from 34.6 percent last year, the survey showed.

"There simply are more options for entertainment these days outside of traditional toys," said Anita Frazier, an analyst at NPD. "Kids are using consumer electronics including personal computers, digital music players, personal video players and cell phones at very young ages."

Mattel and Hasbro lack the expertise to compete with video-game systems such as Play Station Portable, Microsoft's Xbox 360 and Nintendo's GameCube and have to roll out simpler electronics with more limited appeal, investors said.

"It's a field where these guys do not have the technological prowess to play," said Peter Goldman, a fund manager at Chicago Asset Management in Chicago who helps oversee US $750 million, including 416,000 Mattel shares. "They are trying to get more digital, but in terms of computer hardware, it's a real difficult game."

The shares of Mattel have dropped 18 percent this year and are headed for their first annual decline in six years. They fell 20 cents to US$16 in New York Stock Exchange composite trading yesterday.

Hasbro generates about 30 percent of yearly sales from games, such as Monopoly. The company's stock has risen 5.1 percent this year after declining almost 9 percent in 2004. Yesterday, Hasbro declined 17 cents to US$20.36 in NYSE composite trading.

"Hasbro has probably done a better job so far than Mattel in terms of integrating electronics into their toys," Ariel's Goldsborough said. "Electronics will continue to be a bigger part of what they do in the future."

Mattel's Dora the Explorer Talking Kitchen is among the holiday season's best-selling toys, said Jim Silver, editor in chief of Toy Wishes, an industry magazine in Congers, New York. The toy teaches make-believe recipes in English and Spanish.

The talking kitchen's popularity has slowed demand for Barbie, according to Gikas, whose rating on Mattel's shares is "market perform." The dolls account for a quarter of the company's sales.

"Kids are expecting technology to be part of their toys," said Ron Antonette, a Mattel spokesman. "Most of our brands have some sort of technology built in them." Those include the Shell Shocker vehicle and the Pixel Chix interactive game, both among Toy Wishes' most popular items.

Toy Wishes also ranks Hasbro's VCam Now, a digital video camera, and IDog, a robotic canine that wags its tail and moves its head when hooked to a digital music player, among its "hot dozen" holiday toys.

Hasbro Chief Executive Officer Alfred Verrecchia told analysts in October the company's new electronic products, such as its VideoNow line of players and disks, generate lower margins than traditional games.

Sales of electronics and communications gadgets for children surged 36 percent in 2004 to about US$675 million, or 3.4 percent of the total market, as toy sales fell, according to NPD.

"Over the last few years, we've built a nice additional business of kids' TV sets and VCRs," as well as electronics such as camcorders, said John Barbour, executive vice president of U.S. stores at Wayne, New Jersey-based Toys 'R' Us. Inc.

Wal-Mart, Target Corp. and Toys 'R' Us are discounting dolls and games most aggressively, Gikas said. The lower prices signal that Mattel, which gets about 40 percent of annual revenue from dolls, and Hasbro may be seeking to boost weaker-than-expected holiday sales, he said.

Chris Burritt NEW YORK, Bloomberg

Video Game Industry Software Declined by 7.8 percent in 2005

Citing lackluster sales in the game-machine market, investment banking firm SG Cowen Securities Corp. has reduced its forecast for the video software game industry in both 2005 and 2006.

The U.S. video software game industry is projected to decline by 7.8 percent in 2005, according to SG Cowen (New York). Originally, the firm projected the market would fall by 4.1 percent in 2005.

The reduced forecast is due in part to supply constraints for Microsoft Inc.’s Xbox 360 game machine, which is more “severe” than originally thought, according to SG Cowen. Sales for Nintendo Ltd.’s Game Boy Advance have also been disappointing.

SG Cowen also reduced its estimates for software makers Activision, Electronic Arts and Take-Two.

SG Cowen Securities Corp.