Darkest Before Dawn

By now it's become a familiar story: annual U.S. toy sales aredown by a few percentage points. 2005 was no exception, with sales having fallen approximately 4 percent that year to just over $22.1 billion. And for the first eight months of this year, that downtrend continued, according to sales tracking firm The NPD Group, Port Washington, N.Y., with total U.S. dollar sales of traditional toys off by 3 percent from where they were year-to-date through August of 2005.

But as any toy industry pundit knows, it's not unusual on a year-to-date basis to see sales down early in the year because such a large percentage of annual sales only occur in the fourth quarter. Between 45 and 50 percent of U.S. toys sales, on average, happen during the year's last three months “so there's a lot that can change in a short amount of time,” says NPD analyst Anita Frazier. “I don't put a lot of stock in where the industry is year-to-date through August because the entire picture can change.”

Action figures and plush, in particular, fared the poorest at retail during the better part of this year, NPD's figures show, with sales down 15 and 13 percent respectively, followed by dolls (down 9 percent), and games/puzzles and outdoor/sports toys, both of which were down 3 percent. The arts and crafts and infant/preschool categories were each flat.

On the plus side, youth electronics sales grew a hefty 23 percent, followed by vehicles (up 8 percent) and building sets (up 3 percent). The last two categories were no doubt helped by the launch of toy lines based on the summer's two hottest children's product tie-in properties: Cars and Pirates of the Caribbean: Dead Man's Chest. And youth electronics (YE) manufacturers should be particularly pleased by the category's fast start considering that anywhere from 60 to 75 percent of annual YE sales historically don't happen until November and December.

Looking at the demographics of who is buying, sales to the market's largest audience segment—kids up to age 7—rose 2.3 percent year-to-date through August to $5.8 billion. And in an interesting glimpse of adult toy collectors' influence on the industry, people ages 18 and over made up a larger percentage of sales year-to-date (19 percent) than did tweens (16 percent).

Yet despite the overall sales drop across the industry year-to-date, the industry's top players consistently reported sales gains in their respective third quarters, developments they all took as positive signs for the holiday season to come.

Market leader Mattel, El Segundo, Calif., moved into the fourth quarter following a July-September session during which domestic sales grew 5 percent over the corresponding period of 2005. The company kicked off the holiday season with a well-received promotional push for Fisher-Price's T.M.X. Elmo and has high hopes for this year's Barbie lines based around the direct-to-DVD feature Barbie in 'The 12 Dancing Princesses,' following three consecutive quarters of positive results for the fashion doll icon.

Meanwhile in Pawtucket, R.I., Hasbro saw its overall North American net revenues top $745 million during the third quarter, up from $712 million a year ago on the strength of its Littlest Pet Shop, Playskool, Nerf, Play-Doh and Monopoly lines. And in a surprise to most pundits, the company managed to maintain a much higher percentage of its Star Wars toy sales than predicted for a period in which there wasn't a new movie to drive the toy line's sales.

At Jakks Pacific, Mailbu, Calif., the company pulled in record third quarter sales thanks to lines like Doodle Bear, WWE action figures and Cabbage Patch Kids. The results gave the company “positive momentum heading into the fodurth quarter,” according to chairman and CEO Jack Friedman, with “strong initial orders for the holidays.”

There was even good news in the specialty toy market where mainstay RC2, the Oak Brook, Ill.-based parent of Learning Curve, said it achieved organic sales growth of nearly 13 percent for the third quarter and almost 10 percent year-to-date, driven by the “strong performance” of its children's toys (up 28.4 percent), led by its Thomas & Friends, John Deere and Bob the Builder lines, and in infant products (up 9.0 percent), driven in part by its Lamaze infant toys. More ominously for the rest of RC2, the company's core collectibles business continued to decrease during the period and was expected to continue to drag down the company's gross margins during the holiday sales period.

If advance word is right, those manufacturers have reason to be hopeful. According to a recent survey by The NPD Group, consumers said toys will be behind only clothing on their must-buy holiday shopping lists this year. They said they expect to spend $153 on toys this season on average, a 12 percent jump from what they told the consumer sales tracking company in advance of holiday 2005, something that Frazier, in part, attributes to higher prices as much as to customers' intent to buy more items. In total, NPD predicts that 47 percent of holiday shoppers will purchase toys as gifts for the holidays this year, up from 45 percent last year. All are signs that “things may be looking up for the industry,” says Frazier.

“Toys remain a huge part of kids' lives and will be a huge part of holiday spending this year,” Frazier says. “Despite some of the recent years' softness, the general business community shouldn't lose sight of how important and how much of a mainstay toys are in kids' lives and dollar spending.”

Looking farther out, the numbers are also encouraging. The total number of children 12 or younger in the U.S. is expected to grow to 49.7 million in 2010, a 3.7 percent gain from the number of children in the U.S. at the end of 2005. The most toy-intensive demographic, infants to 5-year-olds, is projected to grow by 6 percent, followed by 4 percent growth in kids ages 6 to 8 and 2 percent growth among tweens, according to the U.S. Census Bureau.