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Jan. 30, 2021, 9:37 a.m. EST

COVID-19 drove 16% growth in toy sales last year

Tonya Garcia

As parents searched for ways to keep kids happy and occupied during the COVID-19 pandemic, the toy category thrived, with sales rising 16% in 2020 to reach $25.1 billion, according to NPD Group.

“Sport toys” including scooters and skates, “fashion dolls,” like Mattel Inc.’s (NAS:MAT) Barbie dolls, and summer seasonal toys were hot sellers during the year.

“Much of the growth in 2020 was directly correlated to the COVID-19 pandemic and the changing consumer behavior associated with widespread lockdowns and school closures, the disposable income diverted from other types of entertainment to toys, as well as the onset of federal stimulus checks,” NPD said in its report.

Sales were flat year-over-year through March, then sharply began to increase as widespread lockdowns took hold, and increased further as stimulus checks hit consumer bank accounts.

May sales were up 38%, and October, when Amazon.com Inc.’s (NAS:AMZN) Prime Day event took place, experienced a 33% jump.

“The industry’s resiliency is very much underpinned by the reality that, in times of hardship, families look to toys to help keep their children engaged, active, and delighted,” said Juli Lennett, U.S. toy industry advisor for NPD Group, in a statement.

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“Put simply, toys are a big part of the happiness equation.”

The results were actually a bit unexpected.

“Just 10 months ago, we were staring down the real possibility that the industry could be hit with catastrophic losses because there was no way to gauge how the stay-at-home orders and supply chain disruptions would play out,” said James Zahn, senior editor of The Toy Insider.

Though things turned out much differently, Zahn says the industry has felt some pain.

“One area of concern is that the excellent numbers may not be telling the full story as much of the growth benefited the biggest retail players in the game,” he said.

“Many independent stores did not survive the year and we’re already seeing some small stores closing this year. I know of five retail locations that have closed just this week.”

The impact on smaller businesses parallels what the restaurant industry has experienced, with the National Restaurant Association reporting 110,000 closures due to the pandemic.

Zahn says there are new toys to come in 2021, however retailers and toy companies should be mindful that some business won’t repeat.

“I would expect that we will start seeing some declines in certain categories as the year goes on as bigger purchases such as swing sets and playhouses are a one-time thing for most families and already happened last year,” he said.

“Additionally, games and puzzles had a massive year and should start tapering off just as we start to see some increases from licensed products that were pushed into 2021 after being delayed last year.”

Stifel analysts are upbeat about Hasbro Inc. (NAS:HAS) , which is scheduled to report fourth-quarter earnings on Feb. 8.

“[Hasbro] is set up for an earnings recovery scenario in ’21 (which serves as a reason to own the shares, in our opinion), underpinned by cost synergies from eOne , a stronger entertainment lineup, and easier 1H comps,” analysts wrote.

Stifel rates Hasbro shares buy with a $115 price target.

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MKM Partners notes that Hasbro has 10 feature films coming in 2021 compared with none in 2020, including movies based on Marvel characters. Some of the names heading to theaters this year include Black Widow and Spider-Man.

The Magic: The Gathering Arena videogame for mobile devices is also coming this year, MKM said.

MKM rates Hasbro stock buy with a $114 price target.

MKM analysts are also optimistic about Mattel, which is scheduled to release its fourth-quarter earnings on Feb. 9.

“Mattel is very likely in a good position to start 2021 as retail inventory levels remain at below average levels and production/supply chain issues seen in 2020 should not linger,” managing director Eric Handler wrote.

“Management’s recovery efforts should fully resume in 2021 with revenue expected to grow for the first time since 2013 and operating margin pushing into double-digit territory.”

MKM rates Mattel stock neutral with a fair value estimate of $19.

Hasbro stock has gained 10.2% over the last three months, though shares have fallen 9.5% over the past year.

Mattel stock has rallied 20% over the last three months, and is up 21.3% for the past 12 months.

The benchmark S&P 500 index (S&P:SPX) is up 11.9% over the past three months, and is up 17% for the past year.

Link to MarketWatch's Slice.