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<DAILY TROUBLE>
Friday, December 11, 1998
Equity Marketing
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Phone: 310-887-4400
Price (12/10/98): $7 5/8
HOW DID IT FIND TROUBLE?
Small Soldiers has been a chipped hazard. Babe 2 has been a bit of a porker. Godzilla hasn't been much of a thrilla. When Hollywood dreams turn into celluloid nightmares, the losers are plenty. Yet, while the studios and even the movie houses suffer, the hardest hit are often the toymakers looking to capitalize on the theatrical windfall into the realm of merchandising.
Equity Marketing has been hit from all over. For years it has had the prized account that provides Burger King with Kid Meal toy premiums. Some of the most successful campaigns for the company were back in 1993 with the successful roar of The Lion King and then two years later when Toy Story's release found burger-chomping patrons buzzing.
Then Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> jumped ship in favor of the golden arches, signing an exclusive deal with McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %>. While Equity maintained the Burger King account, once the toy premiums went from Woody and Simba to Scooby and Cousin Skeeter, sales slowed considerably.
To compensate, Equity became aggressive. It decided to supersize its toy offerings and enter the riskier world of retail. It was hoping to cash in on can't miss movies like Godzilla and the sequel to the sleeper hit Babe. Godzilla bombed early in the summer season and the company had to deal with toy stores who had to clear out the inventory. Then Babe 2 opened over the Thanksgiving holiday weekend to abysmal crowds. Its $8.5 million first weekend showing at the box office, while Pixar's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXR)") else Response.Write("(Nasdaq: PIXR)") end if %> A Bug's Life opened the same weekend to a more robust $46.5 million, was enough to tag Equity's "Real Talking Babe" toy for an eventual trip to the closeout slaughterhouse.
Babe became a speechless pig. Shareholders got muddied up and fed at the trough.
BUSINESS DESCRIPTION
Equity Marketing makes retail toys and toy premiums that are given away or sold at fast food restaurants and gas stations. For a company putting out relatively cheap trinkets, it has a posh address -- headquartered on Rodeo Drive in Beverly Hills.
FINANCIAL FACTS
Income Statement
12-month sales: $135.0 million
12-month income: $5.0 million
12-month EPS: $0.82
Profit Margin: 3.7%
Market Cap: $46.5 million
Balance Sheet
Cash: $3.0 million
Current Assets: $47.3 million
Current Liabilities: $40.2 million
Long-term Debt: $0.9 million
Ratios
Price-to-earnings: 9.3
Price-to-sales: 0.35
HOW COULD YOU HAVE SEEN IT COMING?
Diversification is not always for the best. Equity Marketing had a niche. Few could compete with the economies of scale that Equity had servicing quick-service food giants like Kentucky Fried Chicken and Burger King with toy premiums. It was somewhat reliable, too. While it helps to have a sixth sense to separate bomb from blockbuster, the small wrapped goodies have a built-in level of sales from families who just happen to be eating at the fast food restaurant regardless of the promotion.
Still, box office firepower helps boost sales, which works to the benefit of both Equity and the chain. Both Equity and Burger King had high hopes for Small Soldiers to wage an all-out attack on drumming up foot soldier traffic, but it was not to be. The overstock proved critical, though, at least the companies knew they could move millions of the Nick Nitro and Chip Hazard figures on the basis of Kid Meal sales alone.
In the retail toy world there are no givens. Godzilla toys continue to be promoted even well into this holiday season, but the company has already had to compensate Toys R Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %> and other toy sellers for the softer-than-expected sales. While the stock had already begun to fall from its $28 high back in February, investors who saw that Godzilla was terrorizing empty seats were able to duck out of this matinee before the tragic ending.
WHERE TO FROM HERE?
Let's not be so quick to dismiss the toymaker. Granted, "Real Talking Babe" is going to be spewing forth some expletives when it heads out to the clearance rack in a month or so. Equity may have a rough quarter or two to deal with for sure.
However, keep in mind that only recently the company was still deriving about 75% of its revenues from the toy premium promotions. The Rugrats sensation should play out well for Equity with its current tie-in with Burger King. While the company has paid out $24.9 million so far this year for a few acquisitions, one of them just happens to be the company that is providing toy premiums to oil companies pouring premium. This is still a solid business for Equity and, given the international currency debacles, outsourcing production overseas has only become cheaper over the past year.
In the buyout bag of goodies was also the company responsible for the Headliners brand of sporting celebrity figure collectibles. As football popularity continues and baseball enters a revival, it is not a bad place for Equity to be -- at least sports won't become a hit or miss in one red carpet theatrical debut weekend.
While the earnings estimates for $1.53 a share next year seem suspicious given the uncertainty of 1999's success in the retail world, it is a stunningly cheap six times earnings if it holds true. Then, of course, the happy ending will belong to the shareholders once again.
- Rick Aristotle Munarriz
([email protected])
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