Wal-Mart Fires Shot in Toy War

The Wall Street Journal

Retailer Cuts Prices After Learning Target's Are Lower

 

 

The annual battle for the minds and wallets of toy-buying parents has gotten off to a particularly fierce start, with Wal-Mart Stores Inc. slashing prices in an effort to keep Target Corp. from being the low-cost leader this holiday-shopping season.

Toys are key to many retailers' success at Christmas, because parents will buy stuff for their kids even when the economy is awful. But in recent years shoppers have tended to snap up the biggest toy bargains and ignore stores' other offerings.

This year, with economic conditions somewhat improved, retailers are hopeful that if they can lure parents with a great price on electronic hamsters or Stinky the Garbage Truck, shoppers will make other purchases. But store chains continue to feel the need to stake their low-cost claims just days after Halloween.

"It will still be a very competitive season for toys," said Craig Johnson, president of Customer Growth Partners, a retail and consumer consulting firm. "The reason you are seeing so much early discounting is that retailers are trying to get an early share of the market."

When the biggest retailers came out with their initial holiday toy prices shortly after Halloween, Toys "R" Us Inc. and Amazon.com Inc.—which is touting 25% off hot toys—telegraphed aggressive price cuts.

Amazon's toy prices are for the most part within the range of Wal-Mart, Target and Toys "R" Us, which also offer a variety of free-shipping deals on toys to compete with Amazon. Online toy purchases are rising but still make up a small percentage of all toy sales.

Wal-Mart was offering discounts on a broader selection than the bare-bones list of inexpensive toys it promoted last year. But in many cases its prices were higher than those advertised by archrival Target.

Shortly after The Wall Street Journal asked Wal-Mart last week about its price disadvantage, the company issued a new price list, slashing the sticker on many hot toys.

"This underscores our commitment to offer the lowest prices on top toys," Wal-Mart said in a statement.

With its newly announced prices, Wal-Mart beat Target on many toy prices by just a few pennies. But a few big spreads persist.

For example, Wal-Mart is now selling a Barbie doll embedded with a video camera for $39, or $6 less than Target. Meanwhile, Target has priced Stinky the Garbage Truck—a Matchbox truck that tells jokes—at $49.99, after a coupon, or $6 less than Wal-Mart.

Both retailers say that if a shopper presents them with a print ad featuring a lower price, they will match it.

But Target has a new, potentially potent price weapon that Wal-Mart does not: Shoppers get an extra 5% discount on all purchases, including toys, if they pay with a Target credit or debit card or the Target Visa card.

A much lower proportion of Wal-Mart's customers use credit cards of any sort. Wal-Mart's Discover Card gives buyers 1% back on purchases. As of yet, it has not matched Target's 5% discount.

Casey Carl, vice president of toys and sporting goods at Target, said, "We are doing things differently this year. We're expanding our discounts throughout the season."

Target is putting half of its 2,000 toys on sale this year, an increase of about 10% from 2009. The discounts released last week expire Nov. 24, but will be followed by other sales through the holidays.

"From everything we heard, Target was disappointed with their toy sales last Christmas and they seem to be coming out swinging harder and faster," said Eric Johnson, professor of management at Dartmouth College's Tuck School of Business.

Wal-Mart, meantime, is trying to convey that its toy section, which had shrunk by 30% in recent years, is expanding again, at least during the holidays. It also has more than quadrupled the size of its toy-oriented circular for newspapers, which this year has 52 pages.

In a departure from the last two years, when Wal-Mart emphasized toys for under $10 and $5, the retailer is touting popular toys across a range of prices. The most expensive item on Wal-Mart's top toy list is Big Foot The Monster, which walks, talks and burps, for $84.88.

"We've expanded the selection of toys and widened the array of price rollbacks," said Laura Phillips, Wal-Mart's senior vice president of toys and seasonal merchandise.

Ms. Phillips said that while Wal-Mart's price cuts will last through the season, competitors are expected to raise and lower their prices until Christmas. At rival stores, she said, "customers will have to chase sales."

Dartmouth's Prof. Johnson said he sees a shift in Wal-Mart's strategy. "They don't seem as intent on running everyone out of the toy business," he said.

The holiday selling strategy at Toys "R" Us goes beyond price, said Chief Executive Gerald Storch. The retailer is stocking a wider variety of toys in general and more exclusive toys, where it is not necessary to compete on price. The company, for instance, made a big bet this year on a line of miniature die-cast trains called Chuggington that aren't sold by Wal-Mart, Target or other big chains.

Toys "R" Us also holds events that bring products to customers ahead of the competition, such as Sunday's sale on merchandise involving teen heart throb singer Justin Bieber.

In addition, the retailer offers shoppers who enroll in a loyalty program 10% back on holiday purchases up to $500, via store credit. And the company has created an iPad app where children can create a wish list.

But that doesn't mean Toys "R" Us is ignoring its rivals' prices, Mr. Storch said, adding, "At any time, anyone can have the lowest price on a toy and we respond accordingly."

'Toy Story 3' a Smash for Mattel as well as Pixar

Associated Press

 

Parents snapped up toys tied to the box-office smash "Toy Story 3" in spring and early summer, helping Mattel's second-quarter net income more than double. But the toymaker sounded a cautious note for the holiday season and shares fell.

The maker of Barbie and Hot Wheels said Friday its net income rose to $51.6 million, or 14 cents per share, from $21.5 million, or 6 cents per share last year. That just missed analyst expectations for net income of 15 cents per share, according to a poll by Thomson Reuters.

It was the first time Mattel hasn't beat or matched expectations in five quarters. Also, the company reiterated that it expects rising costs in the second half of the year. Shares fell 7 percent in midday trading.

Revenue remained strong, up 13 percent to $1.02 billion, matching analyst expectations. A year ago revenue was $898.2 million.

CEO Robert A. Eckert said sales of Barbie and Hot Wheels were strong and said toys tied into Pixar's "Toy Story 3" made a "stellar contribution" to the quarter.

"With the all important second-half of the year ahead of us, I am encouraged by the strong momentum of our product line," he said.

Still, he said he expects retailers will remain cautious when ordering toys for the holidays.

"Retailers continue to be tight on inventory, that's not surprising to us," Eckert said. "Similar to last year, people are going to be cautious and they tend to buy what they're selling as opposed to buying a lot in advance of selling."

Mattel, based in El Segundo, Calif., has experienced a resurgence in strength in its classic brands such as Barbie and Hot Wheels. Barbie revenue rose 6 percent and Hot Wheels 11 percent. Its new licenses to make toys tied to preschool stalwart "Thomas and Friends" and World Wrestling Entertainment have been strong as well. Mattel also just introduced a new product line, "Monster High" which features toys tied to a group of teens who are descended from famous monsters that go to high school together.

Other toys it is hoping will be hits for the holidays include a $49.99 Barbie doll that has a video camera inside and lets kids record video and watch it on an LCD screen on the doll's back; Dance Star Mickey, a $69.99 doll that dances and sings; and Matchbox's $59.99 Stinky the Garbage Truck, a toy truck that moves and talks.

As the company heads into the second half of the year, including the crucial holiday season that accounts for up to half of toymakers' annual revenue, it is facing rising costs for commodities like oil and resin, the primary material used in plastic, and is dealing with rising wages in China.

Mattel said price increases in 2011 will be "more likely than not," given what is going on with the supply chain.

The company, which is in the middle of a cost-cutting plan, said it expects to be on the high end of its guidance of saving $180 million to $200 million in 2010.

Standard & Poor's analyst Erik Kolb said in a note to investors that operating costs were higher than he expected and he has concerns about rising production costs in the second half of the year.

He lowered his opinion on Mattel to "Hold" from "Buy."

But some analysts suggested the decline might be a good opportunity.

Stern Agee & Leach analyst Margaret Whitfield said the delay of "Toy Story 3" in Europe — pushed back because of the World Cup — may have hindered some revenue that investors were expecting in the second quarter, but that will help third quarter revenue, she said.

Chief rival Hasbro reports second-quarter results on Monday.

Barbie, Thomas and Friends drive Mattel 1Q Profit

NEW YORK (AP) - Much like the characters in the "Toy Story" movies, sales of a broad array of Mattel toys burst to life in the first quarter.

Mattel Inc. got a boost from new toy lines like Thomas and Friends and World Wrestling Entertainment, and such standbys as Barbie also performed well, leading the toy maker to post a surprise profit.

The strong results point to the fact that toy sales - which held up better than those of many other products during the recession - are recovering more quickly as well.

"Toys always hold up better than other segments within retail, and retail activity in general seems to have improved," said Sterne, Agee & Leach analyst Margaret Whitfield. "There's a sense that consumers are coming out of hiding."

The No. 1 U.S. toy maker also has a strong lineup this year compared with previous years, Whitfield said.

Mattel's classic brands performed well. Barbie sales rose 5 percent - the second straight quarterly increase for the 50-year-old fashion icon after nearly two years of decline. Drivers included the career-themed "I Can Be" line, the Barbie Basic "Little Black Dress" line and a spring Barbie that comes with a mermaid tail.

Sales of Hot Wheels rose 9 percent, and John Deere toys are hot again.

Mattel's newly licensed toy lines showed strength as well. WWE and "Toy Story" helped sales in Mattel's entertainment division rise 35 percent. The "Toy Story 3" movie is set to open during the summer, and that's likely to get shoppers buying.

Fisher Price sales rose 5 percent, helped by the Thomas and Friends line, and American Girl sales rose 6 percent.

Overall, Mattel, the No. 1 U.S. toy maker, earned $24.8 million, or 7 cents per share, for the three months ended Mach 31. That compares with a loss of $51 million, or 14 cents per share, a year earlier. Analysts polled by Thomson Reuters, on average, had expected a loss of 3 cents per share.

Revenue rose 12 percent to $880.1 million. That was well above the $859.9 million analysts predicted.

CEO Bob Eckert said he expects the new toy lines to remain strong.

"We expect them to perform more akin to evergreen toy brands rather than one-hit wonders," he said.

The sales growth, significantly better than the company's 1 percent revenue increase in the fourth quarter, may indicate that shoppers are beginning to spend money again on nonessentials and becoming more confident in the economy recovery.

On Wednesday the Commerce Department said March retail sales rose 1.6 percent, up from 0.5 percent in February. That was better than most economists had predicted.

Still, after spending a year slashing inventory during the consumer spending cutback that began in late 2008, many retailers remain cautious and are buying what they need rather than building up inventory, Eckert said.

"In essence, retailers bought what they sold this year," Eckert said. "We're still seeing inventories a bit below the prior year, and I've seen some studies that suggest broadly and that is not just toys and not just in the U.S."

Mattel said in the second half of the year, it expects higher costs for commodities like oil and minimum wage pressure in China, but said it will raise prices if it needs to.

Mattel, based in El Segundo, Calif., also cut costs during the quarter, lowering other selling and administrative expenses to $292.5 million from $317 million.

In the past year Mattel has cut jobs, improved its supply chain, reduced the number of items in development and slashed capital spending to offset sluggish sales as part of a plan to save $180 million to $200 million in 2010.

Rival Hasbro Inc. will report its quarterly results Monday.

Shares rose 60 cents to $24.35 trading, after briefly touching a 52-week high of $24.60.