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5 reasons Santa could be cruel to toy makers

Thursday, 24 Oct 2013 | 6:26 AM ET
Michael Phillips | E+ | Getty Images

Hasbro and Mattel both reported strong third quarter earnings, but the Christmas season might not bring much holiday cheer to toy makers.

"We believe the 2013 holiday season is shaping up to be a challenging one for the toy industry," Needham analyst Sean McGowan wrote in a recent note.

McGowan still recommends that investors buy both Mattel and Hasbro, due to his expectation that investors "are going to look past this year" and focus on 2014 and 2015. But he presents five compelling reasons why this holiday shopping season won't exactly bring comfort and joy to toy company investors.

Reason one: The consumer is not in great shape

"There's a lot of pessimism about how the consumer is acting for certain segments," McGowen told CNBC.com. For instance, he notes that while demand for homes has been very strong, demand for other items is understood to be much weaker.

There is certainly the data to back up this widely held belief. According to the U.S. Department of Commerce's most recent reading, real (or inflation-adjusted) disposable personal income was a meager 1.6 percent higher in August than it was a year prior. Compare that the S&P 500, which rose 23 percent from August 2012 to August 2013.

Investors, then, worry about the "skittishness of consumers," as McGowan puts it. And if consumers are skittish, that could easily translate into smaller gifts under the tree.

(Read more: 'Horrendous' holiday ahead for retailers: Pro)

Reason two: "Birth dearth"

Demographic trends are working against toy companies, McGowen says. The analyst notes that the recent peak in U.S. births came in 2007, so that 8 percent fewer babies were born in 2012 than in 2007 — a trend he refers to as "birth dearth."

"Obviously a reduction in the number of babies reduces primary demand for products that would be purchased for babies and, in later years for toddlers, preschoolers and young children," McGowen said.

That said, McGowen added that U.S. births "appear to be on the rise this year."

$ave me: Holiday budgets
On this week's "$ave Me," Kelli Grant give tips on how to stretch your shopping dollar.

Reason three: The holiday season will be shorter

Another concern for the holiday shopping season comes from the calendar. In 2013, there will be 26 days between Black Friday and Christmas — six fewer than there were in 2012.

The last time that the number of days between Thanksgiving and Christmas dropped dramatically was in 2008, and "it was the worst year the industry's seen in 40 years," McGowan said. On the other hand, he acknowledges that the year was also marked by "the onset of the worst recession in 75 years," which probably did more damage than the calendar.

All in all, while McGowan says there's not enough data to make a compelling case about whether or not a shorter holiday season tends to do damage, he believes that it "won't help."

(Read more: $ave Me: How to save on holiday gifts, in advance)

(For the record, one thing he's not worrying about is 2013's extremely rare convergence between Thanksgiving and the first night of Hanukkah. "In New York, that might matter," McGowan said. But in the rest of the country, not so much.)

Reason four: Competition from video games

In 2013, there will be "rising competition from new digital entertainment," McGowen said. After all, both Microsoft's Xbox One and Sony's PlayStation 4 are being launched in November.

While noting that these are big-ticket items whose early adopters "are likely to be older consumers outside the toy marketing window," McGowen adds that "families have limited budgets, and if these new consoles get purchased as 'family' devices that can be used by multiple family members for games, TV and movies, it could eat into the money available for traditional games."

Reason five: Retailers could be conservative about inventory

McGowen says that retailers could exhibit "inventory conservatism" in the holiday season, "which would dampen manufacturers' shipments."

McGowen notes that "Several large retailers of discretionary goods have seen inventories rise faster than sales in the first half of this year." That could make them more discriminating when it comes to their holiday purchases.

Of course, the risk for retailers is that the holiday season then turns out to be better than many expect.

"In 2009, you had a lot of nervous going into the holidays," McGowan said. "But consumers showed up more than expected, and the companies that actually had inventories on hand did okay."

McGowen notes that the pessimism and nervousness around the 2013 holiday season could similarly "set up a potential for a positive surprise." And in fact, in some recent good news, FedEx said on Wednesday that they expect to see holiday shipments rise from 2012.

(Read more: FedEx expects increase in holiday deliveries)

Still, the analyst provides ample reason why investors might choose to remain cautious when they assess Santa's likely offerings.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

Follow "Options Action" on Twitter: @CNBCOptions.

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