The hottest toy this Christmas might have just gone off the rails, leaving Spin Master Corp. (TSX: TOY) investors pondering a speedy exit from its stock. How the company responds to this crisis will dictate the degree to which investors forgive Spin Master heading into 2017.
Should you stay or should go?
Itâs not a good thing when your star toyâHatchimalsâappears on the Today Show just three days after Christmas, and theyâre reporting on irate parents furious with the company for delivering a dud of a product.
Apparently, many of the eggs wonât hatch, leaving children very distraught over the most highly anticipated gift of Christmas 2016. The runaway success story has caused people to pay as much as US$60,000 to acquire the toy at eBay and other online resale stores, well above the US$59.99 suggested retail price.
Now, all that consumer excitement appears ready to crumble. If Spin Master doesnât get this right, history has shown investors will show no mercy; the stocks of toy manufacturers are notoriously vulnerable to bad PRâand this is the worst.
Spin Masterâs Facebook page has been overwhelmed with commentsâmost of them negativeâleaving the companyâs customer service team scrambling to respond to frustrated parents.
â”Egg wouldnât do anything, no noises no lights. Did all tips and tricks, even watched the YouTube video. Had to manually hatch it,” wrote one mother on Facebook. “Changed the batteries and it still wonât do anything. Upset 6 year old on Christmas morning. Very very disappointed in this product.”
The reaction on Twitter has been much the same.
“@SpinMaster I have been calling for 2 days, it keeps telling me to call back later, #Hatchimals is a dud and store wonât take it back,” Jessica Brown tweeted on December 27.
Spin Master has reacted to this problem in a timely manner, adding more staff to speak with upset parents.
“We have increased the number of customer case representatives, extended our hours and increased the capacity for callers in the queue to help prevent calls dropped due to the holiday volume,” a Spin Master spokesperson told CNN December 27. “We are reviewing each and every consumer inquiry.”
Interestingly, if you look at Spin Masterâs stock movement year-to-date, you will see that most of its 56.9% gain came prior to Hatchimals being launched October 7. Spin Master closed October 6 at $32.29. As I write this, itâs down around 5% and is right back where it was prior to launch; it closed 2015 at $21.86.
The gains Spin Master stock has made this year have been gradual based primarily on three good quarterly reportsâQ1 revenue up 52%, Q2 revenue up 41% and Q3 up 23%âwith no mention of Hatchimals until the third quarter.
Hereâs why Spin Master shareholders should be concerned.
“Itâs not just hype,” toy analyst and CEO of Klosters Trading Corporation Lutz Muller told BNN in a phone interview. “Spin Master has been quite brilliant with this [âŠ] itâs definitely going to last into next year.”
The company has been working feverishly in December to get more product to the stores, but with the latest blowback, how likely are toy buyers to commit to additional orders until Spin Master is able to assure the public that the toys arenât defective?
Not very.
The toy business is a fickle one at the best of times. This might have been Spin Masterâs 15 minutes of fame. If it doesnât turn around the Hatchimals story in 2017, it doesnât necessarily mean it wonât continue to grow revenues by double digits, but I wouldnât count on its stock gaining 50% or more in 2017.
If I owned Spin Master stock and bought anywhere in mid to low $20s, Iâd be inclined to sell half my position, take some profits, and wait for this situation to resolve itself. If I’d bought above $30, Iâd be inclined to sell before a small gain becomes a loss.
Long term, I see Spin Master doing well, but 2017 might have just become a write-off for its stock.
