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Toy vendors and their retail partners are playing it safe and keeping inventories lean amid tariff uncertainty, raising the likelihood of toy shortages for the holiday selling season.
”It's a little bit of a black box, but the back half of the year is going to look like,” said Hasbro’s CEO Chris Cocks last week on his company’s second-quarter analyst call. “I think you're going to see companies like us be cautious on our inventory.”
On the positive side, he said the consumer “tends to be continuing to buy,” citing a recent bounce back in consumer sentiment and few signs of pull-forward buying by consumers in anticipation of inflation. However, he expects tariffs to raise toy prices and retailers to remain cautious with orders.
“I think consumers are going to have a bit of choice because they're still very promotionally sensitive right now,” said Cocks. “But a lot of hot products are going to likely be out of stock this holiday because we're just not going to be able to replenish them because we didn't have the upfront inventory for them. So, like a PLAY-DOH Barbie, a Nano-Mals, a baby Evie - if you're a mom or a dad, you're probably going to want to go and buy that early.”
Exposure to China production makes the toy industry particularly vulnerable to tariffs. According to Politifact, the U.S. International Trade Commission’s data shows 78.3% of U.S. toy imports and 85% of Christmas-related imports (such as lights, trees and decorations) are manufactured in China.
The Toy Association, the industry’s trade group, determined the inflation rate for toys, games and play equipment increased 2.2% between April and May, its largest monthly increase in four years, according to the Wall Street Journal.
The WSJ article indicated that numerous toy manufacturers are undertaking layoffs as part of cost-cutting moves to offset the impact of tariffs while retailers are delaying purchasing decisions and avoiding riskier new product launches.
“They’re in a wait-and-see pattern, and that’s incredibly paralyzing for our industry,” Greg Ahearn, CEO of the Toy Association told the business publication.
For the second quarter, trade uncertainties and a shift from direct imports to domestic shipping caused a 16% sales decline in Hasbro’s Consumer Products Segment and a 15% decline in North American gross billings for Mattel. Both companies expect orders from U.S. chains to recover in the second half.
Cocks told analysts, “We expect to make up much of this delayed ordering in Q3 and into Q4 as sales ramp into the holidays.”
Mattel lowered its sales guidance for the year to a growth rate between 1% to 3% versus 2% to 3% previously. On Mattel’s second-quarter analyst call last week, CEO Ynon Kreiz said the change was “purely about general uncertainty regarding consumer demand in the back half of the year.”Kreiz expects Mattel to benefit in the second half by continued healthy momentum for Hot Wheels, UNO and the overall action figure category, as well as some recovery at Barbie and Fisher-Price. He told analysts, “We do expect the toy industry to continue to perform well. We expect it to grow for the year. And again, there is that uncertainty regarding consumer demand, but most of what we see is positive.”