Sector financial performance:

This company, which primarily designs, produces (owned and third party), markets, and distributes toys products, has been grouped into toys sector in toys and gaming industry.
It seems that the demand for traditional toys provided by companies in this sector has been declining (excluding effect of toys “R” us) in matured markets. However, demand for value-added toys, including those using high technology and popular story related brands, seems to be stable. Emerging market may present one of options for these toys’ companies to maintain their growth.
While it may not significant for Toys “R” us’ liquidation to impact companies’ sales, it already causes direct impact on many companies’ profit margin in 2017 and 2018. The typical gross margin is about 37% and with a SG&A as percentage of sales of 39% the operating margin is about -3% in 2018. The typical enterprise price/sales ratio is 1.6.

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Company performance:

It seems that the demand for toys products of this company has been declining in both North America and Europe in the past several years partially attributable to decrease from toys ”R” us.
The first three months of fiscal 2018 compared with the same period of 2017 (ended March 31 2018)
Net revenue decreased about 4% (increased 0.5% excluding toys “R” us) attributable to decrease/increase in North America market.
Fiscal 2017 compared with fiscal 2016
Net revenue decreased about 11% (including toys “R” us) attributable to decrease in North America market.
Fiscal 2016 compared with fiscal 2015
Net revenue decreased about 4% attributable to decrease in international market and as well North America market.
Its gross margin went down from about 49% to 36% in 2018 due to impairment of inventory of toys “R” us.  With the increased SG&A as percentage of sales (up from 40% to 46% due to decreased revenue and increased expenses), we see a significant decrease in its operating margin (down to -10% in 2018). Its average EBI/share decreased significantly in the past three years.

Stock performance

This company is having an enterprise price/cash flow ratio of 26 (excluding toy “R” us). We think that its stock is being relatively fairly valued compared with its peers JAKKS PACIFIC. but its performance in revenue after toys “R” us shock will matter.

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