Mega Brands expects economy will cause late Christmas shopping season
Published Thursday November 13th, 2008
MONTREAL - Struggling toymaker Mega Brands Inc. (TSX:MB) hopes a global economic downturn won't hamper its ability to sell newly launched products over the coming month as it gears up for the year's key toy selling period.
"All indicators are pointing to a later holiday shopping season than ever, but we continue to believe that Christmas is going to happen," Vic Bertrand, the company's chief innovation officer, said Thursday during a conference call about third-quarter results.
Mega Brands launched its major marketing drive this month to support a series of new products.
Third-quarter net sales of toys declined nine per cent to US$101.7 million due to lower shipments in the boys five-plus category, including MagNext whose launch has been slower than expected.
"We're seeing in the current climate in general retail price points at $30 and higher are slower than those at lower price points," he told analysts.
Mega Brands returned to operating profitability in the summer period, but lost US$122.1 million overall thanks to slower sales and a huge non-cash writedown on its books.
Sales fell 12.6 per cent from a year ago to US$160.9 million reflecting weakened consumer demand for toys and other of the company's products, the Montreal-based company, reporting in U.S. dollars, said.
Excluding a $150-million writedown for goodwill impairment related to the 2005 takeover of U.S. arts-and-craft maker Rose Art, Mega Brands said it had earnings from operations of $22.2 million. That was up from a year-ago operating loss of $5.1 million.
The $122.1-million net loss, worth $3.34 per share, compared with a loss of $11 million or 31 cents per share in the year-earlier quarter, when sales were $184.1 million.
"With the economic situation out there retail is tough pretty well everywhere and we're seeing some of that in the toy industry as well," said CEO Marc Bertrand.
The company also took a $6.9 million of product recall charges related to penalty payments to retailers caused by its March recall of its discontinued Magnetix toy.
Following the end of the quarter, Mega Brands decided to significantly reduce operations in the "underutilized" former Rose Art manufacturing facility in Shenzen, China that made Magnetix.
Production of the replacement MagNext has been outsourced to facilities that already make half of its products. The change to be completed by year-end will improve margins next year, analysts were told.
National Bank Financial analyst Benoit Caron said the toy industry will continue to face pressure in the coming year as the U.S. economy teeters towards recession.
"If anybody was still expecting sales to be up this year, they don't read the papers enough," he said in an interview.
Caron said Mega Brands has faced a perfect storm over the past couple of years from soaring costs and punishing product recalls.
"If they just stop printing with red ink, it's a big improvement going forward and that should be enough to ensure survival of the company."
The company said it no longer foresees a quick sale of its stationery and activities division, whose sales slumped 18 per cent to $59.2 million.
"Based on what's happening in the capital and debt markets it's very difficult right now. We think a deal is unlikely to be concluded shortly," Marc Bertrand said.
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