This report does not constitute a rating action.

Tariffs, lower birth rates, and consumer purchasing power are just a few factors weighing on toymakers this year. Traditional toys such as dolls and cars bought by adults for children as well as those related to films, TV, and gaming continue to be popular despite the growth in entertainment alternatives. In addition, adults are buying more toys for themselves--a demographic that recently has become a leader in the toy-buying market. Here, we discuss some industry trends and headwinds as we highlight two key U.S. toy manufacturers: Mattel Inc. and Hasbro Inc.

Overall U.S. Toy Sales Have Stabilized

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We expect the U.S. toy industry's growth to be flat for 2025 as a heavier entertainment lineup is partially offset by cost fatigue.   The country's toy industry sales were flat year over year compared to 2023, according to the market research company Circana Inc., which is a better-than-expected outcome than our previous assumption. In addition, the industry saw a boost in demand from adult buyers this past year, particularly in certain toy categories, namely the building sets segment. However, we believe adult toy-playing consumers will be more fickle and prone to forego purchases in deteriorating macroeconomic conditions than typical parent toy buyers. This year, our macroeconomic forecast has consumer-spending growth easing to about 2.3% from 2.6% due to the monthly growth rate of real personal disposable income lagging the growth rate of consumer spending the past six months.

Amid persistent inflation, consumers' preferences for experiences over goods, and easing consumer spending growth, we believe the toy industry will hold steady in 2025 as a wearied consumer continues seeking value in toy purchases. In addition, the better-than-expected 2024 holiday season could be a tough comparison for topline growth for toy manufacturers in 2025. Still, some manufacturers will look to grow despite a stagnating industry, bolstered primarily by toys linked to a heavier slate of feature entertainment releases scheduled throughout the year such as Minecraft the Movie for Mattel Inc. and Captain America: Brave New World for Hasbro Inc. We continue to believe the toy industry is somewhat resilient to economic slowdowns and that even in an uncertain economic environment with persistent inflation, consumers will reliably purchase toys for children.

Tariffs Could Mean Risky Business

With heavy exposure to China, sizeable tariffs would increase input costs for toy manufacturers.   We believe sharply higher and prolonged tariffs would ultimately dampen manufacturers' gross margins. During Trump's last administration, tariffs were more targeted and didn't have a huge impact on the toy industry. However, this time around, the levies will apply to many consumer goods, including toys and toy inputs like plastic, clay, and fabric. While manufacturers have made concerted efforts to lessen exposure to China over the past few years, we believe Trump's recently imposed 10% additional tariff on Chinese imports and potential greater tariffs would mean an increase in input costs and ultimately dampen gross margins. In response to the most recently imposed tariffs, Mattel stated on its most recent fourth quarter earnings call that it expects to utilize its global supply chain and pricing power where it can to maintain gross margin, and we would expect Hasbro to use similar resources to attempt to alleviate the impact on its margin. Toy manufactures will likely try to pass on these higher input costs to the degree they can, but ultimately retailers' willingness to continue to share higher input costs with toy manufacturers depends on consumers' willingness to pay higher prices. We believe amid a flat toy industry this year, higher tariffs could pose a significant burden on margins and may lead to weaker credit metrics.

Toy manufacturers have been decreasing dependence on China the past several years.   Prodded in part by tariff threats in 2019 under the first Trump administration, there has been a long-term trend across the toy industry to make fewer toys and games in China by relocating factories and diversifying supply chains. Rated toy manufacturers Mattel Inc. and Hasbro Inc. have made efforts to shift production away from China, sourcing only about 50% and 40%, respectively, of production from China last year and both issuers are pursuing strategies to further decrease exposure in 2025. Mattel expects to mitigate its exposure to below 40% in 2025 and Hasbro expects to minimize exposure to roughly 20% within four years.

U.S. Demographics Are Altering Buying Trends

Unfavorable demographic trends present potential headwinds for long-term growth in the toy industry.   But digital gaming could be the new avenue for growth for traditional toy manufacturers.

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Lower birth rates and declining population growth

The U.S. fertility rate has been trending below the 2.1 replacement rate since 2010, resulting in a decreasing natural-born population and a decrease in the country's children ages 0-5. An ongoing decline in this population could be troublesome for the toy industry and lead to more pressure on sales. The three- to five-year old segment has traditionally been the most important age group for the toy industry according to Circana; however, adults ages 18 and older overtook this segment for the first time during the first quarter of 2024, contributing more than $1.5 billion in sales. A shift to an older customer could introduce more volatility to the U.S. toy industry because we believe adult toy buyers will be more fickle and more prone to forego purchases in deteriorating macroeconomic conditions than typical parent toy buyers, who purchase toys for their children for special occasions and holidays.

While the overall U.S. population has been steadily increasing due to immigration, most immigrants are over the age of five. Furthermore, an overall low birth rate has led to a declining number of young children under the age of five. With a lack of early exposure to brands, this may increase marketing and advertising costs for toy manufacturers in future years to introduce older children to U.S. brands and maintain market share. A shrinking young child population and delayed toy brand exposure could lead an industry already reliant on trends to become even more competitive.

Digital gaming gaining ground

Both Mattel and Hasbro have expansive portfolios covering a wide array of ages, which could offset potential demographic headwinds. Recently, both companies have been investing in digital gaming, looking to capitalize on new trends in play and on a demographic that is older than their traditional market targets. Hasbro has seen success partnering with Scopely Inc. (not rated)--headlined by its Monopoly Go! digital game--and has incorporated digital games into its long-term strategy. Hasbro's revenue concentration in online, card, and tabletop games (Wizards of the Coast and digital gaming segment) increased to 29% of total net revenues in 2023 compared with 14% in 2019. Mattel has also been successful in this area with its joint venture Mattel163 with Net Ease Inc. (not rated)--headlined by its digital game Uno. In addition, both companies are betting on the long-term trend of digital products by investing in self-published video games, with Mattel recently announcing its expectation for the company's first self-published digital game in 2026. Both companies, with their scale and diversity of brands, will likely be able to capitalize on new shifts in play as digital and the age of play continues to expand.

Two Leading Toymakers—Two Different Trends

Mattel Inc. (BBB/Stable/--)

Mattel has achieved good organic growth over recent years, while Hasbro's has steadily declined.   Mattel has experienced solid overall growth since 2019, driven by the success of entertainment releases such as the Barbie movie in 2023, and continues to grow its market share across its core brands. Improvements in design, innovation, and execution has led to outperformance compared to the overall U.S. toy industry and improved credit metrics. In line with the company's publicly stated guidance, we expect Mattel's revenue to be up modestly, driven by heavier entertainment offerings bolstered by Jurassic World, Snow White, and Minecraft. We also expect its vehicle segment to gain share, led by Hot Wheels as it continues to benefit from its low price point. Our rating outlook on Mattel is stable for the 'BBB' rating, and we expect the company will sustain a good cushion relative to our 2.75x net leverage downgrade threshold through 2025.

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Hasbro Inc. (BBB/Negative/--)

Hasbro's consumer products segment has steadily declined over recent years, and now a greater share of its revenues comes from Wizard of the Coast.   Hasbro's Wizard of the Coast segment has performed well, growing approximately 90% since 2019, offsetting some of the seasonality and decline of its consumer products segment. Wizards of the Coast is geared more toward an older demographic and digital gaming, which provides more stable revenue throughout the year and doesn't follow the traditional demand trends of toys, which are more concentrated toward the second half of the year. Its consumer products segment, which is composed of traditional toys, has struggled the past few holiday seasons and has led to the company's stressed credit metrics for the 'BBB' rating, as indicated by our negative rating outlook. The company is in the midst of a turnaround, exiting unprofitable business lines in 2024 and attempting to right size its cost base. Our negative outlook reflects our expectation that leverage will be modestly above our 3x downgrade threshold potentially through 2024. We could lower the rating if we no longer believe the company can sustain S&P Global Ratings-adjusted debt to EBITDA below 3x and free cash flow to debt above 15%.

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