Q3/24 IN LINE - STRONG M&D CONTRIBUTION SUPPORTS GUIDANCE BEING MAINTAINED
THE TD COWEN INSIGHT
Spin Master (“Spin”) Q3/24 results were in line with our forecast, inclusive of a strong contribution from M&D. As such, 2024 guidance was maintained. We believe this supports our positive thesis that Spin trades at an unwarranted discount to peers, that investor sentiment for M&D should improve, and that growth should accelerate in 2025. These factors should narrow its valuation discount.
Impact: SLIGHTLY POSITIVE
Q3/24 Summary (Figure 1): The Q3/24 results were in line with our forecast, but a notable y/y improvement as the contribution from Melissa & Doug (“M&D”) far outweighed the Q3/23 contribution from the Paw Patrol movie (“PPM”)/Unicorn Academy launch, and anticipated weakness in Digital Games. The Adjusted EBITDA/EPS of ~$278mm/$1.60 compares to our forecast/consensus of ~$278mm/$1.58 and ~$288mm/$1.63 (inclusive of a notable outlier skewing consensus).
Key Positives: M&D beat our Q3/24 forecast and appears on track to exceed its
2024 guidance, and this has been a key impediment to Spin's valuation this year. The performance bodes well for a strong Q4/24 contribution and its 2025 growth outlook. This along with strength in its incumbent Toy segment supports its 2024 consolidated guidance being maintained, that appears reasonable and illustrates an unwarranted valuation discount to its peers.
Addressing Headline Negatives: The Entertainment segment revenue/EBITDA declined >40% y/y. This is a lumpy segment and Q3/24 included a $16mm (100% margin) contribution from PPM, and notable Unicorn Academy launch contributions that explains the entire y/y decline. Second, Digital Games declined in line with our forecast, as consumer weakness/competitive environment weighed on the segment as anticipated. Despite these headwinds the EBITDA margin ex-PPM was flattish as M&D volume increments (~32% EBITDA margin) offset the mix shift. We expect investment/product launches to improve the Q4/24 results sequentially.
Conclusion: We believe Spin's inferior valuation is due to poor sentiment toward M&D, that should improve with this release and clarification of Digital Games/Entertainment on the call. An improving outlook for M&D, along with its maintained guidance details its punitive valuation, that should support a narrowing of the valuation discount relative to peers.
This also makes us increasingly constructive on the 2025 growth outlook, including international expansion of M&D, growth in its Ms. Rachel license, expanded presence in the value chain, several new external licenses, and maturation of Digital Games/Entertainment properties launched in 2024.