Sabrina Escobar

President Donald Trump's tariffs on China could be a death blow to many American toy makers, industry lobbyists say. However, Hasbro's recent earnings report suggests that at least some of the major players anticipate navigating the trade challenges successfully.

A little under 80% of all toys sold in the U.S. are made in China, per The Toy Association, a trade group. While the industry largely avoided the initial round of Trump's tariffs in 2018 through lobbying efforts, the current situation presents a greater threat.

Under Trump's first administration, the U.S. imposed tariffs ranging from 10% to 25% on Chinese imports, which the group at the time said would have a "devastating" impact on the industry. The current 145% tariff on products, coupled with a 10% tariff on all global goods, will be even more detrimental, The Toy Association said.

Nearly all -- 96% -- of American toy makers are small and medium-size businesses, according to the association, which also includes big players such as Hasbro and Mattel. A survey of 410 of these companies indicated that nearly half of respondents said the tariffs will put them out of operation. Many others are delaying or canceling orders, which the association says could "quickly result in loan defaults and bankruptcies."

This bleak outlook contrasts sharply with Hasbro's strong first-quarter report on Thursday, which has shares soaring nearly 16% to $61.06. The surge has bought the year-to-date movement out of the red to a gain of 9%.

Hasbro's sales rose 17% to $887.1 million, topping analyst estimates for $771.1 million, according to FactSet. Adjusted earnings per share of $1.04 also topped projections for 67 cents a share.

Crucially, Hasbro kept its full-year guidance unchanged despite factoring in tariff uncertainty. It still expects net revenue to be up slightly from the prior year, with adjusted earnings before interest, taxes, depreciation, and amortization ranging from $1.1 billion to $1.15 billion.

As one of the biggest players in the game, Hasbro's plans for the year and how it manages tariffs are sure to be examined under the microscope by rivals and investors.

Still, the company's results shouldn't be used to draw conclusions about the entire industry's performance. While larger companies such as Hasbro and Mattel aren't immune to tariffs, they have more flexibility to adapt than their smaller counterparts.

Roughly 50% of the toys and games Hasbro sells to the U.S. come from China, well below the industry standard, said Gina Goetter, Hasbro's chief financial and operating officer, on a call with investors Thursday. The company plans to bring that percentage down "meaningfully" to be below the 40% mark by 2026 -- a shift that not every toy maker can afford. Hasbro acknowledged that China will continue to be a major manufacturing hub given the country's specialized capabilities that have developed over decades, and how shifting manufacturing strategies comes at a cost.

"If we move products like sourcing for PlayDoh from China, which is where it's dominantly sourced from the U.S. today, to Turkey, which we've been using to source to Europe, there is a cost associated with that because the logistics in Turkey are just kind of different," said CEO Chris Cocks.

Hasbro expects tariffs could lower profit by $100 million to $300 million in 2025, or $60 million to $180 million when factoring in efforts to offset tariffs. The final figure depends on resulting trade policy, and changes in consumer demand.

These mitigation initiatives include diversifying the company's sourcing, talking with retailers about inventory management and promotions, and increasing toy prices. Other toy companies will try to implement similar strategies, but again may find themselves limited by their size, scale, and balance sheets.

Raising prices may be the easiest attempt to reduce the impact, but some companies may be reluctant to do so to avoid dampening consumer demand. The National Retail Federation estimated last November that a tariff rate of 70% on China could increase toy prices by about 36%, and as much as 56% if tariffs rose to 120%.

To further mitigate the impact, Hasbro is accelerating its cost-cutting program and is now aiming to save $175 million to $225 million this year. The company also benefits from its Wizards of the Coast game business, which owns the Dungeons & Dragons and Magic: The Gathering brands. Better-than-expected demand should buffer the toy cost pressures, executives said Thursday. Wizards products are largely board games, card games, and videogames, which Hasbro said are more insulated to the tariffs because many board games are produced domestically.

To be sure, with policy still in flux, it's hard to know the real impact that tariffs will have on the toy industry at large. The Toy Association has been heavily lobbying the Trump administration for lower levies. Trump himself hinted this week that the current level of tariffs on Chinese imports will come down -- but won't be zero.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 24, 2025 12:11 ET (16:11 GMT)

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