Soft Consumer Demand and Retail Channel Congestion Portend a Tough Start to 2023 for Spin Master

We don’t plan any material change to our CAD 50 fair value estimate for no-moat Spin Master TOY and view shares as attractive after considering fourth-quarter results and the firm’s initial peek into 2023 expectations. The firm had already released its fourth-quarter sales in February, pointing to a decline of 25%, which largely trended in line with its narrow-moat peers Mattel and Hasbro. While late 2022 sales growth was impacted by proactive positioning of product that arrived early in 2022 to avoid supply chain issues, it was also derailed by a weaker consumer that was not motivated by marketing tactics to facilitate conversion. The smaller sales base led to significant expense deleverage, positioning Spin Master to generate 2.7% adjusted EBITDA margins, down 990 basis points from the year-ago quarter. We contend the full-year metric offers a better perspective given sales timing differences during 2022, with a 19.3% adjusted EBITDA margin up 10 basis points versus 2021 (excluding Paw Patrol movie distribution revenue). Despite the differences in flows during a difficult 2022, Spin Master was able to generate stable profitability, an expectation that it has also offered for the year ahead.

The firm’s initial outlook for 2023 calls for gross product sales that are flat to slightly down with EBITDA that is flat to slightly up, indicating the resiliency of Spin Master’s profitability even during uncertain times. We think the firm’s near-term sales potential has fallen victim to cautious retailers that are unwilling to replenish given lumpy demand and a post-holiday hangover of competitor product (Spin Master’s owned inventory declined 24% at year-end). But we expect product at retail will be rightsized over the next few quarters, leading Spin Master back to a more normalized trajectory for growth. As such, we don’t plan to alter our long-term average sales growth forecast of 5% given the still-robust opportunities Spin Master can capitalize upon.