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MINNEAPOLIS - November 17, 2003-The $21 billion U.S. toy industry is the largest toy market in the world. It is a mature industry at a crossroads, looking for ways to grow. Since 2002, the industry has been experiencing sales declines. Given these facts, what will this holiday season bring for the toy industry? What will be the key areas of growth? Will the video game sector continue to gain popularity? U.S. Bancorp Piper Jaffray Senior Leisure and Entertainment Analyst Tony Gikas answers these questions and much more in a recently published in-depth report titled, Toy & Video Game Industry Primer. The report is divided into four chapters: Traditional Toy Overview, Toy Industry Trends, Investing in Toy Stocks and The Video Game Industry.

Traditional Toy Overview:
The United States toy market constitutes approximately 37 percent of worldwide retail toy sales, based on the most recent data from the NPD Group Worldwide. Gikas reports that the $21 billion domestic toy industry stands at a crossroads as overall growth continues to slow. According to the NPD Group, retail toy sales actually declined two percent in 2002 to $20.2 billion. The industry has essentially matured, product quality is below average and economic conditions have softened. Sales of traditional toys have decreased four percent year-to-date through the month of September.
"Overall we anticipate toy sales in 2003 will increase approximately two percent to $20.8 billion," said Gikas. "Our estimate assumes an increase in consumer confidence and spending, a strong product lineup, improving retail backdrop and a stable geopolitical outlook."

Toy Industry Trends:
A big trend in the industry is the large mass merchant retailers capturing market volume through aggressive advertising and competitive pricing, taking share from small and specialty retailers. Currently, Wal-Mart (WMT, $55, #=), Toys "R" Us (TOY, $12.74, #=) and Target (TGT, $38.64, #>=) account for 50 percent of domestic retail toy sales. "As more and more toy dollars are spent in mass merchant stores, these retailers continue to garner additional power with vendors, increasing the importance of key retail relationships," said Gikas.
A key factor impacting toy sales is the size of the addressable market. According to Gikas, demographic trends have stabilized and turned upward. According to the 2000 census, the United States has approximately 59 million children under the age of 15 years. The overall population trends for U.S. children have stabilized since the mid-1990s following five-plus years of rapid growth in the birth rate. Children aged 12-13 years old today, born in the early 1990s mini baby boom, have largely grown beyond their peak traditional toy playing years and are now more interested in sports and other forms of entertainment, including video games. On the other hand, a positive factor influencing toy sales is the large and affluent baby boomer population, which is entering grandparenthood and as a result beginning to drive additional demand as it purchases toys for its grandchildren.

Investing in Toy Stocks:
Gikas believes toy stock fundamentals are better than they have been in many years as improved balance sheets, streamlined product portfolios and reduced costs have left the companies lean and in a position to be aggressive after years of acquisitions and redundant infrastructure. "The prospect of an improving economy, coupled with improving fundamentals, makes toy stocks more attractive in the current period than they have been during the last five years. Generally speaking, we suggest investors increase their toy exposure late in the calendar year (November -December) and reduce exposure moving into the second half of the year."
In the report, Gikas talks about the challenging retail environment that exists, including challenges from competition, age compression and less favorable demographics that continue to weigh on the overall category. "Considering the leading toy product lines look much improved, we estimate domestic toy sales will grow near 1-2 percent during 2003," said Gikas. "In general, we expect that the larger toy manufacturers like Hasbro (HAS, $22.19, #>), Mattel (MAT, $19.38, #=) and LeapFrog (LF, $34.35, #>) will take share at the expense of small manufacturers in unfavorable categories."
Overall, Gikas points out that historically, toy stocks exhibit a significant amount of seasonality and are most attractive at the end of the calendar year as anxious investors reduce exposure prior to earnings releases. "The seasonality of toy stocks reflects out-performance during the first half of the calendar year and underperformance during the second half of the calendar year relative to the overall market," said Gikas.

The Video Game Industry:
Extensive debate exists as to which stage of the video game cycle the market is currently experiencing. "We believe spring 2003 marked the midpoint of the current video game cycle, in terms of the product life cycle of current generation video game hardware," said Gikas. "We anticipate the next generation of video game hardware will be introduced in autumn 2006, depending upon the competitive positioning of the video game console manufacturers and existing demand for current generation products."
"In addition, we expect 2003 will be the peak year for unit sales of current generation hardware sales. We are forecasting that 22.3 million hardware units will be sold in North America in 2003, a modest increase from 21.1 million units in 2002 and will subsequently decline in 2004 to sales of 20.3 million units as the installed base of video game hardware becomes saturated."
To receive a copy of Toy & Video Game Industry Primer, clients and members of the media
should contact Susan Beatty at or 612-303-5680.

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