Hasbro (NASDAQ:HAS) reported strong results on Monday, 10/17, and shares shot higher as a result. Mattel (NASDAQ:MAT) is due for earnings after the bell on Wednesday, 10/19, and we expect Mattel's numbers to be even better than Hasbro's numbers. We think the Barbie comeback accelerated in Q3 and that Suicide Squad merch sold particularly well in the quarter. Despite a rich trailing valuation, the company is looking at strong earnings growth potential over the next several years, and we think a strong ER beat Wednesday could send shares materially higher.
After several weak quarters, Barbie bounced back strongly last quarter behind a refreshed product line. Our research indicates that this comeback persisted and even accelerated in Q3 as the girls' doll space at large is growing, the comp remains weak, and search traffic trends remain strong.
Similar to last quarter, Hasbro's big beat was driven largely by strength in the Girls' segment. Some fear this means Disney Princess sales are eating into Barbie sales, but concurrent to Hasbro Girls' 35% growth last quarter, Barbie had its big comeback quarter with 23% growth. It appears that the girls' doll space at large is growing, so we view Hasbro Girls' 57% growth this quarter as a positive signal for Barbie sales. Barbie is also facing an easy -14% comp, while search trend data shows a recent spike in Barbie search interest.
To a lesser extent, Hasbro's strong quarter benefited from continued healthy growth in its Entertainment and Licensing segment. We think MAT had an even better quarter with respect to movie tie-in sales, almost entirely thanks to Suicide Squad.
Although Suicide Squad received mixed reviews, it smashed August box office records, indicating high consumer interest. In anticipation of this interest, Warner Bros (NYSE:TWX) prepped an aggressive merchandise roll-out prior to the movie's launch, and it appears to have paid dividends. Most obviously, Suicide Squad action figures dominate the top-selling list on Mattel.com, including holding the top 2 selling spots in the DC Universe. Less obvious, though, is that Suicide Squad has kicked off a turnaround in costume and comic book sales, both of which we think indicate strong Suicide Squad-related merch sales across the board during the quarter.
For 11 consecutive years, Princesses were the best-selling Halloween costume. The likeability and uniqueness of Suicide Squad's new cast of characters, however, pushed Action/Superhero to the top of the best-selling Halloween costumes list, with Harley Quinn from Suicide Squad nabbing the overall number 1 spot. This is a dramatic shift, and implies large and positive consumer reception to Suicide Squad's characters. While October costume sales didn't show up in the quarter, they could point to a strong guide. Moreover, strong Mattel costume sales in October imply strong Mattel merch sales in August and September.
Then there is the whole comic book fanatic angle. Since 2011, comic book sales have been dominated by Marvel. Partly due to excitement around Suicide Squad, however, July 2016 marked the first month since 2011 wherein DC topped Marvel in terms of comic book sales. Then, in the month of August when Suicide Squad debuted, DC accounted for 9 of the top 10 selling comic books. DC again dominated September comic book sales, accounting for 8 of the top 10 selling comic books in that month. Essentially, DC turned a 5-year slump into a 3 consecutive month win-streak, thanks almost entirely to Suicide Squad. We think merch sales, including Mattel action figures, likely accompanied the pick-up in DC comic book sales.
In sum, although Suicide Squad was a flop among critics, we think it had huge consumer spending implications in the merch world. Two rather predictable markets (costumes and comic books) were disrupted, and we think this implies strong Suicide Squad-related merch sales across the board. We expect this to show up in Mattel's numbers tomorrow, as well as a continued bounce-back in Barbie sales. While the trailing valuation remains rich, we maintain that forward catalysts such as a continued Barbie bounce-back, DC Comic resurgence, Jurassic World, and Cars afford the stock a richer valuation than peer Hasbro. We like the stock into the ER, and believe shares can trade materially higher on a good quarter.
Disclosure: I am/we are long MAT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.