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Sept. 6, 2017, 1:26 p.m. EDT

Weak box-office results spell trouble for toy makers like Mattel and Hasbro

Lego has already seen its sales slump, will cut 1,400 jobs

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By Tonya Garcia, MarketWatch

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Analysts say toys tied to “Despicable Me 3” undersold, raising questions about “movie fatigue.”

The toy industry is suffering from a bad case of “movie fatigue,” according to BMO Capital Markets analysts led by Gerrick Johnson, with toys based on movies underperforming expectations.

Hollywood has had its worst summer box office in more than 10 years, with a summer movie season that won’t crack the $4 billion mark.

BMO analysts say the total U.S. box office is down about 5% this year.

“In addition to lackluster performance at the box office, we blame an over-saturated movie market, fatigue in certain properties associated with multiple sequels, and competition from entertainment from other screens for underperformance of movie-related toys,” BMO said.

See also: Hollywood is already trying to put dismal summer box office behind it

Lego A/S announced that sales for the first half of 2017 fell 5% year-over-year, its first revenue decline in 13 years. The company plans to cut 1,400 jobs as a result. Sales had gotten a boost from toy sets tied to movies. However, sales in mature markets like the U.S. and Europe have slowed and, according to Jørgen Vig Knudstorphe, Lego brand group chairman, the company’s structure has grown “overly complex.”

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See also: Lego sales hit brick wall; 8% of workforce cut

Shares of both Hasbro Inc. /zigman2/quotes/201249319/composite HAS +0.80%   and Mattel Inc. /zigman2/quotes/209819189/composite MAT +0.22%   were down in Tuesday trading after Lego’s announcement.

BMO said sales of entertainment-related toys have increased to 38% of sales from 15% over the past 10 years. Investor expectations about the contribution of these toys to company profits have risen in kind.

However, BMO analysts contacted industry executives about sales of toys tied to movies and got “overwhelmingly negative” responses.

“The main reason for underperformance, in our view, is that there are too many movies being released and released too frequently,” BMO wrote. “Aside from cannibalization, the rapid release of new movies makes each movie less relevant, less able to stand out amongst a crowded field, and limits general buzz.”

BMO rates Hasbro shares market perform, but cut its price target to $90 from $95.

Analysts there rate Mattel outperform and lowered the price target to $23 from $25.

Read also: Disney is accelerating the shift to streaming TV, and Wells Fargo says investors’ fears are overblown

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