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November 2, 2023
Spin Master Corp. Have no fear, Paw Patrol is here
Our view: Spin Master reported Q3 Adjusted EBITDA ahead of RBC/Street forecasts, while 2023 guidance saw mixed revisions (our Adjusted EBITDA forecast remains ~unchanged post-Q3). Overall, we are neutral on the quarter (positive bias) as the company reported revenue in-line with consensus and adjusted EBITDA ahead despite macro headwinds driving some softness in the toy market. Reiterating C$51PT and OP rating.
Key points:
Thoughts exiting Q3 – Spin Master's Q3 Adjusted EBITDA was ahead of expectations, while 2023 guidance update reflected mixed revisions (Revenue guidance lower, Adjusted EBITDA margin guidance higher). Q3 Gross product sales ("GPS") were +9.9% YoY, with growth driven by higher order volume as retailers increased inventory ahead of the holiday season (recall that seasonality was impacted last year due to the acceleration of customer shipments in H1/22 ahead of anticipated supply chain disruptions). Despite the strength in Q3, Spin Master noted that retailers are closely managing inventory levels in Q4 given the softening macro backdrop (which may impact inventory replenishment opportunities going forward). With that said, we believe the company remains well positioned given its new product launches (e.g., Bitzee), content-related launches (e.g., Paw Patrol Academy; see our highlights from the recent Investor Day here), and expected contribution (i.e., toy sales) from PAW Patrol: The Mighty Movie (+$170MM at the box office already thus far).
POS declined for the 4th consecutive quarter; retailers managing inventory levels – Spin Master noted that POS in the toy industry (across G10 countries) was -MSD% in Q3 (in part driven by consumers delaying holiday purchases), marking the 4th consecutive quarterly decline. With that said, we note that toy industry sales remain above 2019 and Spin Master has outperformed the broader market/gained share (the company is now the 4th largest toy manufacturer globally). For perspective, Spin Master's Global, U.S., and International (i.e., excluding U.S.) POS for Q3 were -7.5%/-11.5%/+0.7%. Overall, the challenging macro backdrop has caused retailers to pause or reduce planned orders (particularly from mid-October onwards) in order to avoid potential post-season inventory issues (for perspective, Spin Master's retailer inventory levels were -8% YoY globally and -22% YoY in the U.S.). As it relates to Spin Master, we note the company exited Q3 with inventory of $153.3MM (+1.1% QoQ; -14.1% YoY).
2023 guidance revised – Spin Master's revised guidance includes: 1) Toy GPS to be -HSD% YoY (vs. "flat to slightly down" prev.); 2) Revenue to be -MSD% YoY (vs. "flat" prev.); and, 3) Adjusted EBITDA margin to be up YoY (vs. "flat to slightly up" prev.). Management cited slowing POS/ toy orders in Q4 (driven by economic headwinds/inflation/higher rates impacting consumer spending) as a driver of the revision. Net/Net, our updated forecast still reflects +2.6% YoY Adjusted EBITDA growth in 2023 (vs. +2.5% prev.).
