We hosted an investor lunch today with Spin Master management. In attendance were Max Rangel (Global President & CEO) and Mark Segal (EVP & CFO). Topics in focus included recent retail sales performance, the strength of the company's IP portfolio, the opportunity with Melissa & Doug, and capital allocation priorities. Overall, the discussion reaffirmed our view that the company's 3 vectors provide good diversification and growth opportunities, which should position it well through the cycle.
Black Friday/Cyber Monday were in line with expectations – Management noted that the demand trends during the "Turkey 5" period (i.e., the period between Black Friday and Cyber Monday) were in line with expectations. This indicates good progress Q4 to-date following the commentary at Q3 reporting (see our note here), where Spin Master noted that the challenging macro backdrop had caused retailers to pause/reduce planned orders (particularly from mid-October onwards) in order to avoid potential post-season inventory issues. Taking a step back, management noted that following the rapid expansion that the U.S. market saw during the pandemic period (double-digit growth), top-line trends are now "regressing" toward the historical 2%-4% range. In comparison, International markets did not see as strong of a run-up during the pandemic period, and as a result are not being impacted as significantly today. Looking ahead, Spin Master expects that the U.S. toy market will close 2023 above pre-prandemic levels (driven by pricing, with units to be largely in line with pre-pandemic levels).
A strong portfolio of IP with a number of avenues for monetization – Spin Master noted that the momentum in both its Digital Games and Entertainment segments continues following the late-September debut of Paw Patrol: The Mighty Movie, which has already grossed +$200MM at box office to-date (we note that the movie will launch in Japan on December 15; recall that a third Paw Patrol movie has already been greenlit for 2026), and the launch of the Paw Patrol Academy mobile app, which was released in conjunction with the movie. Further, management outlined that Unicorn Academy has been well-received by audiences to-date following its debut on Netflix in early-November. Looking ahead, Spin Master is aiming for Unicorn Academy toy sales to begin in the fall of 2024, while licensing & merchandising will also launch in 2024. A digital game could then follow in 2025, which we believe highlights the multiple avenues through which Spin Master is able to monetize its IP.
International expansion opportunity in focus for Melissa & Doug – Management outlined the International opportunity for Melissa & Doug (see here for more on the acquisition), which the company expects to begin executing on in 2025 (following some initial integration steps and various contractual obligations that need to be wound down). For perspective, Melissa & Doug currently only has a direct presence in the U.K., with the other International markets being served via distributors (the U.S. market was the primary focus previously). Looking ahead, Spin Master is aiming to grow Melissa & Doug's International revenue mix, which the company believes it can do by leveraging its marketing expertise and dedicated Sales personnel in International markets (in turn, there should be pricing/margin benefits following the conversion from distributor to direct-sales). As it relates to synergies, management expects it will take ~3 years for the company to reach the targeted $25MM-$30MM of run-rate cost synergies.
Melissa & Doug integration the focus over the foreseeable future, but M&A remains in focus – Management reiterated that M&A remains its top capital allocation priority (recall that leverage is expected to be <1.0x following the close of Melissa & Doug in Q1/24), followed by dividend increases and then buybacks. On M&A, management noted they will be focused on integrating Melissa & Doug; however, they remain open to tuck-in acquisitions (primarily product additions).
RBC Capital Markets is acting as financial advisor to Spin Master Corporation in connection with their acquisition of Melissa & Doug as announced in the press on October 11th, 2023.