Post by
retiredcf on Jul 29, 2022 10:22am
CIBC
EQUITY RESEARCH
July 28, 2022 Earnings Update
SPIN MASTER CORP.
License To Chill: Looking Past Seasonality Shift
Our Conclusion
We see Spin Master’s caution on H2/22 as overly conservative, and believe
EBITDA margin guidance will increase in Q3. Short-term worries are nothing
new in this industry, but we have conviction in TOY’s longer-term tailwinds:
ongoing strength from its flagship Paw Patrol franchise, incremental licensing
wins, a robust balance sheet, continually expanding margins, and the intrigue
of a potential new franchise in Vida the Vet. Even if Digital growth slows, the
core toy business has been soundly improved and upgraded from years past.
We view execution as admirable and consider TOY an optimal name to own
within a tough discretionary space. We reiterate our Outperformer rating and
$62 price target.
Key Points
Slowdown In Consumer Spending Limits Investor Optimism, But TOY
Should Be Well Positioned: Management conceded this morning that
consumer spending is slowing in some regions, a product of inflation.
Nevertheless, we view the toy and entertainment categories as relatively
defensive in this environment. Furthermore, Spin Master continues to
outpace the industry, with Q2 point-of-sale growth of 10% vs. the industry’s
7%. Further licensing wins and Vida the Vet hold promise for 2023 and 2024.
Macro Environment Aside, Still A Solid Q2, And Expect Q3 Guidance
Increase: We acknowledge the industry’s near-term uncertainty, but Q2
offered further evidence that TOY is a structurally higher-margin business
than in the past, while still offering high-single-digit top-line growth, with
$500MM in net cash available for M&A, and less risk of inventory hiccups.
The unchanged EBITDA margin guidance (stable Y/Y) seems improbable: for
that to happen, we estimate TOY would need to see H2/22 margins contract
500 bps (perhaps ~250 bps when excluding seasonality factors).
Other Worries Include Digital Slowdown, Retailers’ Inventory Positions:
TOY noted today that it is aware of some retailers’ excessive inventory
positions. We see this as a risk, but believe the company has consistently
demonstrated better management in this regard versus prior years. Another
potential threat concerns a slowing digital games business as consumers
return to pre-pandemic behaviour. We have moderated our growth
assumptions, but still view this as an important source of long-term growth.
Dividend Won’t Turn Heads, But Should Add Some Investors: Spin
Master’s dividend introduction was modest (0.4% implied yield and ~7%
payout ratio on 2022E EPS), but we see three benefits. First, it should add at
least some incremental investors with income mandates. Second, it signals
an openness to capital returns as the company awaits M&A opportunities.
And third, there’s nothing stopping material increases in the future or
something incremental, like a special dividend. We disagree with the notion
that a dividend signals a shift away from a growth focus for the business.