Saving Christmas, Part 2

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A lot of this is going to come down to what happens again over the next 30 to 40 days. If the ports don't release, then even though the inventory is in the trade waters of the US, it's unfortunately out on a boat.

Ultimately, I mean, there's only going to be 3 players. It's going to be Microsoft, Google, and Amazon. The winner ultimately is going to be Amazon, and they're not good at games, but they're really, really good at cloud.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voices you just heard are both Wall Street analysts. Stephanie Wisink at Jefferies covers mass merchant retailers and toy companies, and Michael Pachter at Wedbush Securities covers entertainment, including video games. This is the second half of our look at what supply chain challenges mean for the Christmas selling season. In this episode, we'll hear about some stock picks and about a simple toy that's proving surprisingly popular this year. And we'll get some advice on navigating a shortage of video game consoles. Listening in is our audio producer Jackson. Hi Jackson.

Hi Jack.

This is our first sequel. How do you think it's going to go for us?

I'm hoping for an Empire Strikes Back, maybe a Godfather Part II.

That's way, way too high. I'm looking at RottenTomatoes.com of some of the lowest rated sequels, and I feel like the bar is Deuce Bigelow: European Gigolo and Teen Wolf 2. Those are tied at 9% fresh.

What about Alvin and the Chipmunks: The Squeakquel?

What's the rating?

I'm looking here, 20% on Rotten Tomatoes. Uh, but 87% of Google users like this movie, so the jury's still out.

All right, let's shoot for it. Now, if there's anyone who's listening to this part 2 episode before having heard part 1, first of all, I admire your don't play by the rules podcast listening attitude. Here is a 20-second recap of part 1. Reports that supply chain shortages will ruin the holiday shopping season might be overblown. I'm not saying that supply chains aren't strained. We used the term everything shortage back at the beginning of summer to describe the situation, but there are just now some scattered signs that improvement is coming, the most important of which is falling COVID cases worldwide and in the US, over the past several weeks. And even though we can point to jam-ups and price spikes and shortages, many companies have prepared for the holidays by ordering early. So it's by no means certain or likely that we'll see empty shelves come Christmas. After that, conditions should look more normal around the second quarter of next year, once companies have had a chance to restock, or closer to the end of next year for some goods that use semiconductors. In general, large manufacturers and retailers with sophisticated logistics operations are faring better than smaller players. We heard last week from top executives in shipping and trucking. How about retail? Here's Jess Dankert. She's vice president for supply chain at the Retail Industry Leaders Association, which represents big U.S. store chains.

Certainly our members have been planning for the holiday season for quite a while in advance and have been aware that capacity constraints and supply chain issues weren't going to be going away anytime soon. So they've kind of gone into it with that thinking and again, have applied that same creative problem solving to these issues. I think some of the doomsday forecasting is off the mark. Certainly just in talking to our members, they're optimistic on their ability to flex those supply chains and get the goods that the American consumers want in time for the holidays.

So that's the big picture. I also spoke with some analysts about the outlook for specific retailers, toy companies, and makers of video games and consoles. Let's hear some of those conversations now. First is Stephanie Wisink, a stock analyst at Jefferies. Stephanie covers both big retailers and toy companies, which means she has a deep interest in the outlook for Christmas sales. And she isn't quite as confident as some of the people we heard from last week about the availability of goods later in the year.

Yeah, I think right now what we're hearing is that the big, big, big retailers that have capital to do so are commissioning their own fleets. Costco talked about it. Walmart, we know, is doing it. So there's a power in scale that comes at this time. But at the same time, we're hearing about backups and delays even from those companies. So when the big and the most powerful are challenged to get inventory, the smaller companies are going to suffer. They just don't have the excess capital to go out and fly a chartered plane across the water at, negative margin.

Stephanie says toy companies can do 60 to 70% of their yearly sales during the Christmas shopping season. And of course, getting goods to stores by December 26th does no good. She says a lot will be decided over the next month.

For the toy companies, you know, right now they're feeling okay about their ability to bring inventory in, and some of them did bring in some inventory early. A lot of this is going to come down to what happens again over the next 30 to 40 days. If the ports don't release then even though the inventory is in the trade waters of the US, it's unfortunately out on a boat. If it arrives too late, it's going to hang over into 2022. So it affects these companies and how their future bookings will look. And we're already again hearing that from some other companies in the seasonal goods space that they've already started to pull back on their expectations for first half. So toys is, again, it's one of those categories that's kind of right in the center of the bullseye. And we're just watching day by day. I get my morning update on port congestion, and it's not releasing yet, but we're watching for it too.

Like many people I've spoken with, Stephanie says to start holiday shopping early. She says retailers can normally restock 2 or 3 times between mid-October and mid-December, but that this year they might not be able to do that.

We could see some wobble in the inventory over the course of the cycle. It may mean that things are going to be looking okay for the first round, and then we hit this valley, and then we get another little surge, and then we're out of stock. So for consumers, I think it's, you know, identify what you want and get it early.

Stephanie says Target is the standout performer of the retail group thanks to its omnichannel success. Omnichannel is a retail term for ways in which physical stores and e-commerce can work together. Like making purchases online and picking them up right away at nearby stores. Walmart, Stephanie says, has an opportunity to mimic some of the things that have worked well for Target.

Walmart to us is the most intriguing from an opportunity perspective. Target has been the outperformer over the course of the last year. Target has done an outstanding job of leaning into their visual merchandising, creating stores that are lovely to shop, but also amplifying their customer access through omnichannel, convincing the consumer that it's still cool to buy curbside or to buy online, pick up in store, click and collect. And it is a convenience platform like we just don't see in other places in retail. And I think it's something that companies like Walmart and many others, Macy's, Kohl's, Nordstrom, sporting goods companies, they're all looking to emulate that.

Which toys will be top sellers this year? Stephanie says there are always surprising hot sellers as the season develops, and that this year it's more difficult than usual to make predictions. Some toy fairs were canceled due to COVID, and the theater business hasn't fully recovered yet, so there haven't been a lot of hit movies for kids.

We know that for little kids, they tend to be pretty influenced by entertainment. So Paw Patrol has a movie out this year. My Little Pony has a movie on Netflix that just launched last weekend. So those are going to feel some headline thunder. But as we move up into the upper age cohorts, it's just going to depend on, you know, what kids put on that Santa wishlist and how much parents are willing to spend. You know, is it going to be in that $75 price point and up, or are parents going to, you know, fill the holiday stockings with a lot of smaller gifts? It's not quite clear. Number one, what will be available, but number two, based on what's available, what becomes the hot trending item.

My Little Pony is owned by Hasbro. Those are ponies with wings, and it's been a few years since my daughter and I made one at Build-A-Bear. I thought they had names like Twinkle Nose Sparkle Feeder, Sunshine Rainbow Twinkle Sparkle, but I just looked it up on Hasbro's website and they say there's a new generation of ponies and their names are Zip, Izzy, Hitch, Sunny, and Pip. Is it just me or those also sound like ringers from a local bowling league? Jackson, You know, Izzy told me the hitch rolled a 260 at the Knights of Columbus tournament.

It's Miller time, baby.

Now, Paw Patrol. Those are furry first responders. We had a big Paw Patrol phase in my home. There's a police puppy named Chase, and I don't remember any of the other names. Paw Patrol is owned by a publicly traded company called Spin Master. There's one other hot toy Stephanie mentioned. Jackson, see if you can hear this.

Oh, that's great. That's like therapeutic.

I have a couple of these in the house and I had no idea what they were.

We actually have spoken to a number of toy company executives, and some of the things that seem to be surprising to the positive are things that are tied to kids fidgeting. These little toys called Pop-Its, which is essentially— looks like a waffle that you poke the faces and then you flip it over and you poke them the other way. And it's just a fidget. It's something for kids to play with kind of over and over again.

Jackson, this sounds familiar. You talked with a couple of people at a mall in Rhode Island last week and both mentioned Pop-Its.

Right. I spoke with a kiosk attendant named Haley, and she showed me which toys were selling the best.

Let's hear a little of the chat.

And so both of these stands, you're running two right now?

I'm running four actually.

So we have jewelry, crystals, we have the Pop-Its, which is a new fidget toy, and a bunch of other fidgets. Okay, and there was a kid who was shopping with his dad, right?

Here's Ethan.

I'm at the mall today to buy my friend some Pop-Its.

What are the Pop-Its for? Can you describe them for me what's a Pop-It?

A Pop-It is basically a stress reliever, but most people just use it as a toy. Ethan sounds like a cool customer, and I hope his friend enjoys the Pop-It. Now back to Stephanie. She says the outlook for any one holiday season is typically a poor reason to turn bullish on a toy stock, but as it turns out, the longer-term outlook for toys now is bright.

Looking over a multi-year period, I mean, the toy industry is not a bad business to be invested in. These are big branded companies with great assets. What we're seeing interestingly is the companies are taking slightly different approaches to their business evolution. A company like Hasbro, which is a legacy toy company, is now building out a digital games business under Dungeons Dragons, Magic: The Gathering, two of their big power properties in games. They are also, through an acquisition, they acquired an entertainment studio. So they are building content for their own brands and for big streamers, Netflix, Hulu, Apple, Amazon. So they're a large independent studio in the entertainment marketplace. So Hasbro is a holding company now of multiple different businesses.

Stephanie has buy ratings on Hasbro and Spin Master, which makes those Paw Patrol toys I mentioned earlier. She has a hold rating on Mattel.

Mattel is the other one that people tend to focus on, and that is a purist. That's a toy company today. They are a manufacturer of toys. Their big brands are Barbie, Hot Wheels, Fisher-Price. They're bringing back some old brands. They are the purveyor of Masters of the Universe, the He-Man brand, and they're bringing that back to life.

Oh my goodness.

And so that will, that actually just launched on Netflix as a series. And so this idea of revival and renaissance around classic play patterns, action figures, and conflict and mystery, and bringing that back through entertainment and then following it up with a toy collection.

For those unfamiliar with He-Man, by the way, there was a 1981 line of Mattel action figures called Masters of the Universe, including He-Man, which turned into a cartoon and later a live-action movie starring Dolph Lundgren.

He-Man and the Masters of the Universe.

He-Man carried a sword and shield and had hulking muscles like Conan the Barbarian. Mattel was actually sued over that by the company that controlled the rights to Conan, and Mattel won. One thing that stands out about the original He-Man is that he wore furry underpants, and that's pretty much it. And I'm not an expert on sword fighting, but I'm pretty sure putting on pants and a shirt are steps 1 and 2. In the new Netflix cartoon, He-Man is fully clothed. It's more of a Shazam type story where a kid discovers he can turn into He-Man. There was supposed to be a live-action movie too, but production got shut down by COVID. This was the first I've heard about bringing He-Man back, so we'll see if it works. By the power of Grayskull! One Christmas present that's likely to remain in short supply are video game consoles. The Xbox Series X and S and the PlayStation 5 all launched in November 2020, and they've been hard to find ever since. The Nintendo Switch, which launched all the way back in 2017, has better availability, but it goes out of stock at times too. My family has a PlayStation 4 that I bought a year and a half before the 5 came out, and about 8 months before COVID hit. It was late in the console's life, so I paid a reduced price of $299. I've seen that machine selling this year for $400. That's how short supplies of consoles are. Buyers are paying premium prices for even older machines. Blame soaring demand during the pandemic and the semiconductor shortage.

COVID hit, which meant that parents were suddenly cooped up with their kids. And their kids weren't going to school and weren't playing Little League and had nothing better to do. And so the parents bought them whatever they could buy them. So consoles disappeared. The Switch disappeared.

That's Michael Pachter at Wedbush Securities, who's been covering video games for more than 20 years. He says new console shortages are common because manufacturers want to make sure they don't overproduce, but shortages lasting more than a year are rare. Michael says he's recently seen the new Xbox in stock online, at least briefly, at Target and Walmart, but not the new PlayStation. And the outlook for getting one of those closer to Christmas isn't good. Michael also offered an unorthodox tip for shoppers.

Yeah, I'd say PlayStation, your chances are close to zero of being able to walk into a store and buy one a month before Christmas. Xbox, I know you can do it right now. Obviously demand's gonna increase around November 1st. So if you wanna get somebody one, I would go into a store right now and buy one. And dirty little secret, you know, you can go into a Target and go into the video game section and the kid who's at the desk, you can hand him a $20 bill with your phone number written on it and just tell him, call you when one comes in and you'll be there within an hour and he'll hold it for you.

I'm gonna tell people that and I'm gonna hear from—

It's not illegal.

I'm gonna hear from the brass at Target.

They're gonna call me about that. I think you need to tip people who do phenomenal service. So there you go.

Let me just pause here to note that the Barron's Streetwise Podcast is not endorsing the slipping of cash to video game clerks. Neither Jackson nor I are lawyers. We attend the same legal meetings each year and complete the same online modules, but I'm pretty sure Jackson knows more than I do about these things. Jackson, Would you say this falls under fair use guidelines?

Yeah, you're definitely not using those words right.

Well, you're out of order. Now back to Michael. I asked him, do you have any other tips for getting a PlayStation 5? $1,000.

It'll cost you double. You'll get one if you're willing to spend $1,000.

And where would I— where would I go to do that?

Uh, eBay is the easiest. I mean, a place that it's legal to scalp items, and eBay has them, but you're going to have to pay somebody a premium.

That option doesn't sound great either, so that leaves buyers checking online from store to store each day for stock. There are also a number of Twitter accounts that claim to alert followers when machines come in stock and where. I suppose highly motivated shoppers can follow a bunch of those. Michael also pointed out one more way in which eBay can be helpful.

The way to tell when they're in supply, by the way, do an eBay search. And if they're selling at par, you know, if they're selling it at $499, then that means they're in stores someplace and you can find them.

Console availability doesn't have big stock implications. Microsoft and Sony are both large conglomerates that do much more than gaming. I asked Michael, do console shortages hurt game makers? He says no because games are still available for older consoles. By the way, he also says the new generation of consoles don't bring a big step up in game quality from the previous ones, just better graphics, but you have to look closely to see the difference. I asked Michael which companies in his coverage are well positioned for the holidays. The first one he mentioned will be familiar from the episodes we've done on meme trading and Reddit. But it's not a stock Michael likes.

[Speaker:MICHAEL_SHERMAN] Yeah, this is going to give you heartburn, but GameStop is actually in the best position. Now, its stock is overvalued by $150, but it is in the best position. They actually will thrive. So the Reddit Raiders, the apes who are bidding the share price up, directionally they're right that GameStop thrives when there's low supply and high demand for anything that's physical. And consoles, by their very definition, are physical merchandise. So they're going to really do well, and they will get plenty of them because they really are a destination. Easier to bribe a GameStop clerk than to bribe a Target clerk.

Oh boy. Again, the podcast doesn't endorse PlayStation 5 payola or vouch for the relative ease of using such tactics at particular stores, including but not limited to GameStop. Et cetera. Caveat habeas pro bono, no backsies. Now, how about the video game publishers? Here's Michael.

As far as the publishers, the one that had the standout next-generation game just delayed it, which was Take-Two. So Take-Two had Grand Theft Auto V, which came out in September of 2013, and they had planned to remaster that game for the next-gen consoles only. And charge the full $70 for it. And they were gonna get it, but they couldn't remaster an 8-year-old game fast enough, so they delayed it to March. So they're not gonna thrive at holiday. So the— it's the usual suspects. It's gonna be Microsoft with Halo, EA with FIFA, Activision's Call of Duty.

One last thing. I asked Michael about the state of gaming through streaming services. Without consoles or computers, or any local hardware beyond a TV with an internet connection. He says the quality is already excellent for single-player games, but for multiplayer games, lag or delay is an issue. He thinks big cloud companies— Amazon, Microsoft, Alphabet— will solve the problem and that the winner ultimately will be Amazon. He predicts it'll solve the lag problem by hiding some gaming hardware in a local device like its Echo voice assistant.

When that happens, Amazon's going to transform gaming as we know it. You will expand the addressable market for games to anybody with an internet connection. And so guys like you and me who are too old to actually go out and buy a console and our wives would kill us if we did, we'll talk our wives into getting an Echo device so she can know what the weather is in Las Vegas for next weekend. And then we'll just say, "Alexa, play Call of Duty," and it will happen.

Michael says we're headed into years of incredible growth for video game makers like EA and Activision and Take-Two. And if you want to see why, just look at the history of movies.

Between the 1940s and the 2010s, movies added 6 different ways to see a movie. You know, added commercial broadcast TV and DVD and VHS and pay-per-view and VOD and streaming video on demand and premium cable and all sorts of stuff. As they added all that, box office tripled. So the actual realized revenue for a movie studio went from a percentage of box office to a percentage of 3 times box office. And that's what's going to happen to the game guys. It'll be exactly the same thing. Revenues will double or triple. So you want to own the content guys for the next 5 years because they're going to triple their revenues.

Thank you, Jess, Stephanie, Haley, Ethan, He-Man, and Michael. And thank all of you for listening. Jackson Cantrell is our certified fresh producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough, H-O-U-G-H. See you next week.

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