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Q3/24 RESULTS: CONFIDENCE IN GUIDANCE TO IMPROVE ONCE DIGESTED
THE TD COWEN INSIGHT
Spin Master (“Spin”) reported Q3/24 results in line with our forecast as a strong M&D contribution offset a decline in Digital Games/Entertainment. This should be the focal point for investors, as M&D has disappointed post-acquisition. In our view, its Q3/24 M&D/Toy performance should increase confidence in meeting its 2024 guidance and shift the focus to its valuation/growth outlook for 2025.
Impact: SLIGHTLY POSITIVE
Q3/24 Summary: The Q3/24 adjusted EBITDA/EPS of ~$278mm/$1.60 were right in line with our forecast of ~$278mm/$1.58. This was due to better-than-expected volume/ margin contribution from Melissa & Doug (“M&D”) that more than offset top-line “lumpiness” in its Entertainment segment and an anticipated decline within its Digital Games segment.
M&D Should Be a Focal Point: M&D was the standout in Q3/24, illustrating the benefit of Spin's focus on marketing/product innovation. This resulted in retailers increasingly supporting the brand in the quarter and new products resonating that should remain a tailwind in Q4/24 and 2025. Given this has been a valuation headwind all year, the positive performance/outlook should be well-received by investors as it appears on track to meet/exceed its 2024 guidance and accelerate growth in 2025.
2024 Guidance Tracking Well: Spin maintained its 2024 annual guidance. We are comfortable with the outlook for M&D, but acknowledge the incumbent business needs to generate attractive y/y margin expansion to achieve its guidance. It becomes increasingly clear this is achievable upon understanding the y/y decline in Spin's global inventory at retail (~20%) and the anticipated reduction in forecast sales allowances that were abnormally high in Q4/23. We have made no changes to our financial forecast.
Investment Summary: Despite a stable portfolio of brands/IP at Spin, the toy industry requires innovation and different product lines each year to achieve desired results. The concern coming into the quarter was M&D that is now performing ahead of our expectation, and investor caution today seems to have shifted toward its Digital Games performance. At the end of the day, Spin is on track to achieve its 2024 guidance, generate attractive FCF, and accelerate organic growth in 2025. In our view, the valuation is punitive, the growth outlook positive, and the benefit of being a USD reporter trading in Canadian dollars ignored. Once digested, we believe investors will view the results in a more positive light and reverse course of today's share price reaction. Spin should be rewarded for its versatility in our view, not punished.
