Spin Master Corp T.TOY

RBC

[retiredcf]

November 1, 2023

Spin Master Corp.

Q3 Adj. EBITDA ahead of consensus; full-year revenue guide lower, Adj. EBITDA margin guide higher

TSX: TOY | CAD 32.98 | Outperform | Price Target CAD 51.00

Sentiment: Neutral

First impression: Q3 results in line to ahead; we view full-year Adjusted EBITDA guide as largely unchanged (with some puts/ takes) – Overall, Spin Master reported good Q3 results (revenue was in line with consensus, Adjusted EBITDA well ahead); however, the company called out some softness in the toy market (POS and orders for toys have slowed in Q4, particularly from mid-October onward). While full-year Gross Product Sales and Revenue guidance was (unsurprisingly) revised lower, Adjusted EBITDA margin guidance was revised higher. While we will wait for the call tomorrow to get additional details on the guidance commentary, we think full-year consensus Adjusted EBITDA dollars could remain largely unchanged (for context, our full-year Adjusted EBITDA forecast is below consensus). The downward revision on the top-line was somewhat expected (and has been reflected in recent share price performance, in our view) following what Mattel and Hasbro had noted during their respective Q3 reporting (see our notes here and here for more information).

Results: Q3 Revenue in line, Adjusted EBITDA well ahead of consensus – Gross Product Sales were +9.9% YoY in Q3 to $678.6MM (vs. RBC forecast of $758.8MM; +22.8% YoY), with growth driven by higher order volume as retailers increased inventory ahead of the holiday season (i.e., in line with normal seasonality; recall that seasonality was impacted last year due to the acceleration of customer shipments in H1/22 ahead of anticipated supply chain disruptions). Q3 revenue of $710.2MM (+13.8% YoY, +12.2% YoY on a constant currency basis) was in line with RBC forecast of $717.0MM and consensus of $704.0MM, while Adjusted EBITDA of $234.9MM (+40.2% YoY) was ahead of RBC/consensus of $209.0MM/$213.5MM. The outperformance on Adjusted EBITDA reflected favourable revenue mix (higher Gross Profit) and lower YoY freight (among other areas of cost reduction). Relative to our forecasts, higher-than-expected Gross Profit margin and lower-than-expected SG&A as a % of sales drove Adjusted EBITDA above our forecast (revenue was in line). See table below for details. By segment, Entertainment and Digital Games revenue were ahead of our forecast, while Toys revenue was below.

2023 revenue guidance revised lower, Adjusted EBITDA margin guidance revised higher – Spin Master's revised 2023 guidance includes: 1) Toy Gross Product Sales to be down HSD% YoY (vs. "flat to slightly down" YoY previously); 2) Revenue to be down MSD % YoY (vs. "flat" YoY previously); and, 3) Adjusted EBITDA margin to be up YoY (vs. "flat to slightly up" YoY previously). We note that the revenue and Adjusted EBITDA margin guidance excludes PAW Patrol: The Mighty Movie distribution revenue (i.e., expected contribution from the movie in the latter part of 2023 is one-time in nature and is thus excluded from guidance).

On the 9:30am ET call tomorrow, we expect areas of focus to include: 1) additional details on the full-year guidance commentary; 2) incremental colour on shipment/POS trends Q4 to-date (release noted there has been a slowdown in POS and orders, particularly from mid-October onward); 3) outlook for the Digital Games segment (sales growth and margin were strong this quarter due to higher in-game purchases in Toca Life World and lower marketing & admin expenses, respectively); 4) commentary on expected contribution from PAW Patrol: The Mighty Movie (premiered in late-September); and, 5) any updates on the pending acquisition of Melissa & Doug (for more information, see our note here).