Spin Master Corp T.TOY

RBC

[retiredcf]

Their upside scenario target is $53.00. GLTA

December 6, 2024

Outperform

TSX: TOY; CAD 34.47

Price Target CAD 43.00

Spin Master Corp.
On the Road with Spin Master

Our view: We recently hosted meetings with Spin Master CEO Max Rangel and CFO Mark Segal in Toronto. We continue to see a notably stronger set- up in 2025 and reiterate our Outperform ranking.

Key points:

• Management confident in meeting 2024 guidance with Q4/24 playing out as expected. Acknowledging a still challenged macro environment, a shorter holiday period, the importance of the replenishment cycle and the more last-minute nature of M&D’s relatively high drop shipment activity, management reiterated its confidence in meeting 2024 guidance with Q4/24 playing out as expected. Specifically: (i) the company’s lower price points (down -8% in aggregate YoY) have gained traction with mark downs/sales allowances down YoY; (ii) new product lines/innovations are resonating (particularly Ms. Rachel); (iii) M&D momentum continues; and (iv) within Digital Games, new revenue-drivers have or are expected to re-accelerate growth.

• A long-awaited return to normal in 2025 with a notably stronger set- up. Management believes 2025 will represent the first normalized year for the global toy industry since 2019. We continue to see a stronger 2025 with easier YoY comps and momentum across each of the three segments: (i) within Toys, a more robust toyetic release slate, the full-year impact of Ms. Rachel, increased momentum around licensed IP, growing innovation, continued M&D expansion and greater value channel penetration; (ii) within Digital Games, the inclusion of PAW Patrol Academy into the Piknik subscription bundle beginning January 2025, a more robust feature and content release roadmap for Toca Boca World and the full-year impact of H2/24 game launches; and (iii) within Entertainment, continued momentum from key franchises (Paw Patrol, Rubble & Crew, Unicorn Academy and Vida the Vet).

• On a path to reducing (but not eliminating) business volatility. Management continues to acknowledge volatility within Toys given obvious ‘fashion’ and seasonal elements. While inherent to the business, we believe Spin Master is on a path to reducing overall earnings volatility driven by several factors, including: (i) the larger and more diversified portfolio of core brands (~50% of Toys revenues) and licensed IP (now ~30% of Toys revenues) that in aggregate generate more predictable and stable revenues leaving the remaining ~20% for innovation/disruption (a strength); (ii) the growing contribution from Digital Games and the further diversification effects of Entertainment; (iii) management’s focus on extending the contribution of individual toy brands to multiple years; (iv) what is becoming a more data-driven, 360 degree approach to developing and monetizing IP; (v) by the end 2026, the full realization of targeted M&D run-rate net cost synergies of $25MM-$30MM; and (vi) a potential enhancing of the company’s target financial profile with the provision of a multi-year outlook.