Spin Master Corp T.TOY

RBC

[retiredcf]

Spin Master Corp.

Decent Q3/24 with Toys Offsetting Entertainment and Digital Games; 2024 Guidance Reiterated

TSX: TOY | CAD 32.61 | Outperform | Price Target CAD 46.00

Sentiment: Neutral

Our view

We view Q3/24 results as generally in-line, with higher Toys revenues offset by lower contributions from Entertainment and Digital Games. In contrast to peers, management reiterated its 2024 outlook. We view the quarter and guidance reiteration as neutral to a modest positive for the shares at current levels.

First impressions

• Q3/24 results generally in-line given all of the moving parts. Q3/24 revenues and adjusted EBITDA were $885.7MM (+24.7% YoY) and $277.5MM (+18.1%), respectively, versus our estimates of $881.0MM and $286.8MM (consensus: $868.9MM and $290.7MM). The positive revenue variance was driven by Toys ($810.9MM versus our estimate of $778.9MM). The negative adjusted EBITDA variance reflected lower Entertainment and Digital Games revenues and lower consolidated margins (31.3% versus our estimate of 32.6%). Adjusted EPS was $1.60 versus our estimate of $1.70 (consensus: $1.63). Please see Exhibit 1 for a summary of Q3/24 results versus our forecast.

• A solid quarter for Toys bolstered by M&D. Gross product sales were $922.7MM (+36.0% YoY) versus our estimate of $895.2MM while net product sales were $810.9MM (+34.8% YoY) versus our estimate of $778.9MM. Sales allowances were -$112.7MM translating to 12.2% of gross product sales versus our estimate of -$116.4MM (13.0%). Adjusted EBITDA was $242.2MM versus $166.8MM in Q3/23. Excluding M&D: (i) Toy revenues were $655.9MM versus $601.5MM in Q3/23 while Toys adjusted EBITDA was $192.8MM versus $166.8MM in Q3/23; (ii) the company’s global and U.S. POS each declined -1% YoY while international declined -2%; and (iii) management indicated that the toy industry continues to be challenged by the macro environment. M&D performed well in Q3/24: (i) revenues of $155.0MM were ahead of our $143.0MM estimate; (ii) adjusted EBITDA of $49.4MM was ahead of our $46.7MM estimate; and (iii) net cost synergies related to M&D of $3.1MM were realized in Q3/24, with the company on track to realize in-period synergies of $6MM in 2024.

• A tough YoY comp for Entertainment. Entertainment revenues were $37.1MM (-41.5% YoY) versus our $52.3MM estimate largely due to lower content deliveries with a tough YoY comp, as Q3/23 included the initial delivery of PAW Patrol: The Mighty Movie (with distribution revenues of $15.6MM) and the delivery of Unicorn Academy.

• Lower in-game purchases continue to be a headwind for Digital Games. Digital Games revenues were $37.7MM (-16.8% YoY) versus our $49.8MM estimate due to lower in-game purchases in Toca Boca World reflecting increased competition in the marketplace despite still strong consumer engagement, partly offset by higher subscription revenue from both Piknik and PAW Patrol Academy. Other notables: (i) average MAUs for Toca Boca World declined -5% YoY to 58MM; and (ii) total active subscriptions across the portfolio increased +25% YoY to 434k (versus 426k in Q2/24) with PAW Patrol Academy stable sequentially at 57k subscribers (versus 58k in Q2/24).

• Other notables from the quarter. (i) 952k shares were repurchased in Q3/24 for $21.4MM (266k shares repurchased subsequent to the quarter for $6.3MM); and (ii) FCF priorities for 2024 include investments in IP, entertainment content and digital games, and enhancing shareholder returns.

• Issues in focus ahead of 9:30AM ET conference call on October 31 (dial-in 1-888-510-2154). (i) An update on expectations for toy industry POS, retailer inventories, and expectations for holiday sell-through in Q4/24; (ii) the outlook for Digital Games given ongoing softness in in-game purchases; and (iii) updates around key pieces of IP, including Unicorn Academy and Ms. Rachel and early traction from recent digital game launches.