Why supply chain woes should make shoppers cautious about higher toy prices

Jefferies Sr. Analyst Stephanie Wissink joins Yahoo Finance to discuss the top takeaways in the toy industry as stores expect a shopping boom during the holiday season and if stores inventory can keep up with the demand.

Video transcript

BRIAN SOZZI: Welcome back to Yahoo Finance Live. Will it be a happy holiday season for toymakers with supply chains still in flux? Stephanie Wissink is a senior analyst at Jefferies and covers the toy industry and is here for our call today. Stephanie, always good to talk with you here. So you've been out in the stores. I saw your research report out this morning, taking a lot of helpful photos here. What are some of your top takeaways on all things toys after you've visited these stores?

STEPHANIE WISSINK: Yeah, if Christmas was tomorrow, we'd be OK. The inventory levels look quite plentiful. The October deliveries made it just in time. And what we're looking for now is what's going to happen over the next six to eight weeks in terms of availability of goods. We know that the port congestion is starting to create some hesitation and anxiety.

And certainly we know that, unfortunately, holiday shoppers don't tend to typically start this early in their process. Usually it's early November when we start to see those traffic measures start to climb. And then, of course, we always know that there's a portion of what we call the procrastinators index that turns up late in December and hopes to find those hidden gems left on their Christmas list.

So what we're thinking now about is, what are the phases or waves of inventory that we need to be monitoring most closely? And I think what we're most cautious about right now is that November wave, that November wave getting pushed back a bit into December, which means that the December wave gets pushed back, unfortunately, into January. And that's where we could have some remediation risk. So I'm just watching very closely to see if some of the congestion starts to abate over the next several weeks.

JULIE HYMAN: Man, it sounds like those procrastinators are going to be in trouble, Stephanie, if they wait until the last minute. Talk to me about different types of product and whether there are differences in inventory and about different retailers. Are they going to be getting different levels of access to product?

STEPHANIE WISSINK: Yeah, let's start with the second question first because, clearly, there is a power play in retail. The bigger you are, the more skilled you are. The more dollars you have to work with means that you can charter your own chips. You can charter your own planes. You can build your own fleet of trucks.

So what we're seeing at retail is certainly the specialty retailers are suffering a bit more than the mass merchants or the big retailers. And we would say the same is probably true for the e-commerce-- big e-commerce companies like Amazon as well. They're going to be able to chase inventory in a different way, and they're going to be able to put capital on the line in a different way.

That being said, when we think about product-- specific product categories like toys, where 65% or so of the product is coming from China, we know that that's a really constrained pathway right now. That's the one where the congestion is the most extensive. And toys, unfortunately, is extremely seasonal. So 70% of sales happen in that holiday window.

So if you do not get inventory in, in time, then there has to be some way to digest that inventory slowly in the course of the following few months, or try to take some very quick action to remediate some of that excess inventory through markdowns or late season clearance events.

So we're watching to see how much of the product actually gets diverted into off price channels, how much product gets marked down, when does product flow into the trade, and by product class. Those product categories that can be domestically sourced or in North America from a complimentary perspective are going to be more available. Those that are trapped out on the water, unfortunately, in Southern California, those products are going to be less plentiful.

And so we're watching for specific product classes as well. When we think about some of those big holiday hit items, big items that tend to be over $100, which are really important in the holiday season, a lot of those come from China in order to make the margins work. So we're more cautious, I would say, on the upper end price points, not because consumers don't have the capacity to spend, but just because availability of goods in those areas might be a bit more constrained.

BRIAN SOZZI: Stephanie, your photo of a Jeffrey giraffe inside a Macy's certainly got me laughing this morning here. But Macy's is going to try to make a bigger play in toys this holiday season, and good for them. I mean, could these shops really be a market share gainer versus a Target and Walmart?

STEPHANIE WISSINK: Yeah, I echo your sentiments. And actually, it was quite nostalgic to see that character kind of come back to life in retail. I think it also is a little bit of a nod to the fact that even though Toys R US as a retail entity is no longer present for the consumer, the irony is that the Toys R US brand, the characters, the jingle, is still relevant to consumers today. And so, Macy's is going to try to see what it looks like to do this kind of shop in shop concept.

Probably one of the biggest surprises from our site visits was just how well merchandised it was. Easy to shop, clear navigation, big power brands really taking front and center in terms of the way that the consumer interacts with the product category. So I think they did a great job. I was really impressed. I was concerned that it was going to feel overly cluttered, a little bit disorganized. But it was well done.

So to the credit of Macy's and the Toys R US partnership team, I think they did a nice job of isolating what they think are going to be the most in-demand and desirable items. And clearly because they knew this partnership many, many, many months ago, they were able to plan inventory into it probably even sooner than some of the other retailers.

BRIAN SOZZI: I'll show my boomer self here, Steph. I am still a Toys R US kid. I do want to ask you about your stock picks real quick. You like Hasbro instead of Mattel. Give me the 30 second pitch on Hasbro.

STEPHANIE WISSINK: Yeah, and I would say right now, you know, Mattel is probably in a slightly better position, just given that they operate at a slightly lower price point. They have a bit more North American manufacturing in Mexico. So we think they might actually even look a little bit better in the third quarter. But as we map out into the fourth quarter and think about where some of the risk could be, it's pretty equilateral in the toys category. So that's where the bias slightly pivots more towards Hasbro because they have a diversified business, where consumer products is only about a third to 40% of the total value of the enterprise.

Wizards of the Coast and the digital gaming business and entertainment, they're much more significant for Hasbro than they are for Mattel. And those, of course, are dealing with port congestion and traffic issues. So what we like about the Hasbro story is really this diversified wheel of value creation that is going to carry them at a slightly higher rate of growth and a slightly higher margin potential over time as we look out over the next couple of years.

BRIAN SOZZI: All right, point well taken. Stephanie Wissink, senior analyst over at Jefferies, always good stuff. Have a great weekend.