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  • KPB & Co Research

It has been 8 months since Toys 'R' Us filed for bankruptcy protection, and toys and baby product manufacturers have begun to feel the pinch. Hasbro (NASDAQ: HAS), Mattel (NASDAQ: MAT), and Spin Master Corp (TSE: TOY) are some of the big-name toy manufacturers that have seen a decline in sales and stocks prices. Newell Brands (NYSE: NWL), which manufactures baby accessories, reported a double digit decline in their baby business unit, and has seen its stock price cut in half. We think this is an opportunity disguised as a crisis, as in the long run strong brands with clear value propositions will likely maintain a loyal following. The demand for these brands won't disappear. The onus is on the management of these companies to ensure, that as the retail landscape changes their brands remain front and center.

Toys R Us represent just one of the many distribution channels that customers use to get their hands on goods. More shopping online might mean that foot traffic in stores decline, at the same time the volume of customer orders are likely to pick-up in other channels. Also retail square footage are likely to be re-purposed for experiential type of shopping. In this type of scenario companies who have maintained strong communication channels with their customers are likely to find the transition easier, while others will have up the ante on marketing to get keep customer engaged with their brands.

One point to note is that while we encourage investors to keep an eye out for opportunities in this sector. There is the possibility of getting blinded-sided by a recession. Global economic growth stands on shaky footing and in a context where consumer demand slows, the recovery expected in the toy and baby good sector could be delayed by 4 or more quarters. Companies with strong balance sheets such as Hasbro (NASDAQ: HAS) are well positioned to weather a storm, but companies such as Mattel have been facing deteriorating fundamentals for a while and so has limited absorptive capacity in the face of dwindling demand.

The retail landscape continues to change, rather than "throwing the baby out with the bath water" investors should look carefully at the companies that may face short term headwinds but has good long term fundamentals. As a benchmark, companies that have a strong manufacturing presence, that has control over branding and marketing, and that has a strong connection with their customers are in a good positions to make gains.

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