03/14/2012 07:22 EDT | Updated 05/14/2012 05:12 EDT

Mega Brands sees promise even though shares plummet on disappointing Q4 results

MONTREAL - Toymaker Mega Brands Inc. said Wednesday it foresees long-term revenue growth even as disappointing fourth-quarter results pushed its shares to the lowest level in a decade.

Mega Brands (TSX:MB), which reports in U.S. dollars, said fourth-quarter profits — which include the crucial holiday sales period — declined to $234,000, or a loss of 14 cents per share. That compared with a profit of $11.3 million, or 17 cents per share, a year earlier.

Adjusting for one-time items, profits were $300,000, or two cents per share, down from $11.5 million, or 70 cents per share in the same quarter of 2010.

Sales were $108.5 million, which was down from $111.8 million a year earlier and below a prediction of $120 million, according to estimates compiled by Thomson Reuters.

This marks the first quarter of weaker toy sales for the company in two years.

The Montreal-based company's stock fell almost 19 per cent, or $1.48 to C$6.40 Wednesday on the Toronto Stock Exchange, below the previous 52-week low of C$7 on a share-adjusted basis.

Nevertheless, CEO Marc Bertrand told analysts on a conference call that Mega Brands was "still on track with our plan of growing revenues to over US$500 million in the next three years, which is the same plan we launched when we initiated the recapitalization a couple of years ago."

Reaching that level means the Montreal-based company's revenues should grow by more than 30 per cent by 2014.

Total sales increased two per cent to $376.8 million in 2011 as toy sales grew two per cent and stationery and activities sales were up three per cent.

The company earned $8.3 million in 2011 compared to $131.1 million in 2010. The 2010 results included a $144.3 million gain resulting from the recapitalization program.

Excluding one-time adjustments, net earnings increased to $12.3 million or 75 cents per share in 2011 compared to $900,000 or seven cents per share in 2010.

The U.S. toy industry enjoyed 11 good months before sales dropped by nine per cent in December, pushing retail sales down by two per cent for the year, Bertrand told analysts.

"The fourth quarter numbers were not up to expectations, despite a strong sell-through of our construction toys at retail and good improvement in stationery and activity," he said.

"The decrease in toy sales was mainly due to challenging conditions in the United States and mirrors the experience of most U.S.-based toy manufacturers in the quarter."

The lower sales were weighted in its toy division, where revenues dropped eight per cent, particularly on weakness in U.S. sales.

Prior to the fourth quarter, Mega Brands' results had been steadily improving since several recalls of its magnetic toys reduced sales and nearly forced the company into bankruptcy.

However, the company remained optimistic about its outlook for 2012, noting that it secured the first profit for its stationery and activities business since it was acquired from Rose Art in 2005.

Mega Brands plans to launch several toys tied to new movies this year, including Spiderman. More than 30 new Halo pieces will hit store shelves this summer, preceding Microsoft's launch of its latest Halo video game.

Analysts were disappointed by the quarterly miss but also see strong opportunities for the company in the coming years.

"Overall it was disappointing but I still think that 2012 is going to be much better," said Neil Linsdell of Versant Partners.

He said Mega Brands has moved from struggling to reorganize to significant growth with all their product lines.

"As we get to the latter part of 2012 when the toys do better (we) should see some really good stuff coming out of these guys."

Gerrick Johnson of BMO Capital Markets said Mega Brands construction toys appear to be falling behind rival Lego, which reported a 17 per cent sales gain last year. But he also sees growth ahead for Mega.

"People who have been dwelling more on the restructuring and a disappointing fourth quarter are going to be taken very positively by surprise as we get further into 2012," he said in an interview.

Mega Brands designs, manufactures and markets toys and stationery products in more than 100 countries.

It has some 1,300 employees with offices, manufacturing facilities and distribution centres in 14 countries.

It invested about $10 million in its Montreal manufacturing facility last year. The move should improve efficiencies and reduce costs as production is further shifted from China.