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Published: Sunday, 12/12/2004

Running low on fun

BY JON CHAVEZ
BLADE BUSINESS WRITER
Sales have struggled for years at Ohio Art - the home of the Etch A Sketch. Sales have struggled for years at Ohio Art - the home of the Etch A Sketch.
SIMMONS / BLADE Enlarge

IN THE PAST 12 months, Ohio Art Co. has sold its injection-molding business, left the American Stock Exchange, taken on production of the Magna Doodle drawing toy, and introduced the electronic drawing toy ETO, all in hopes of improving a sagging bottom line.

But red ink at the Williams County toymaker still flows more freely than the magnetized lines on its famous Etch A Sketch toy.

It lost $158,000 in its latest quarter and has lost $2.6 million for the first nine months of its fiscal year. Worse, sales are off 20 percent for the year, following four straight years of decline.

Northwest Ohio's major toymaker, a minor player on the national scene, is beset with problems.

The latest toy, ETO, had a slow start. The latest toy, ETO, had a slow start.
SIMMONS / BLADE Enlarge

It lacks money for extensive research and development to produce innovative toys and for effective advertising of what it does make, which in turn means it has no big hits this year, and that means little room for error without financial bleeding.

Further, the Bryan company is mired in the larger malaise in the industry.

Toymakers generally aren't doing well in the United States, and toy sales have struggled for reasons even experts aren't clear about. Industry leader Mattel Inc., for example, has had only slight sales growth since 1999, and No. 2 Hasbro Inc. has had an average annual sales loss of 6 percent for the last five. years.

"I think it's going to be a disappointing year," said Martin L. "Larry" Killgallon, Ohio Art president. "Right now, we're watching the point-of-sale data every morning we get it."

Mr. Killgallon told The Blade last week that, if sales were to improve over last year's, that would have happened already.

For what typically is a strong fiscal quarter, the one ending Oct. 31 that includes much of the Christmas toy ordering from stores, Ohio Art said sales this year were down in all toy categories except two new products. Even those struggled, it said.

Analyst Sean McGowan, of Harris Nesbitt Gerard in New York, said the toy business is suffering. "There are some companies doing well, but the majority of the industry is doing poorly," he said.

Tom Sosnowski, managing editor of Playthings, the leading industry magazine, said traditional toy sales are declining, but industry leaders aren't sure why.

"With the traditional toys, the parents just don't go out and buy a ton of toys anymore," he said. "It's definitely scaled back but we can't pinpoint the reason."

Other things to buy, such as video games, could be hurting toy spending, he said.

But if Mattel and Hasbro - two firms with millions of dollars for research and development - are struggling, something is amiss, Mr. Sosnowski said. Mattel had sales last year of $5 billion, Ohio Art not even $29 million.

Jim Silver, an analyst and publisher of The Toy Book, an industry

magazine, said many stores that used to sell toys, such as Kmarts and KB Toys, have closed, and that has hurt sales.

Mr. McGowan, the analyst, gave Ohio Art credit for trying to incorporate innovation and technology in recent years.

"Part of their problem, though, has been they are so closely identified with a product that kids don't think is cool," he said. "I don't think any 7-year-old goes to school and says, 'It's so cool! - I'm getting a Etch A Sketch for Christmas.'●"

The firm's latest financial report said shipments of Etch A Sketch were down in the United States and abroad.

Knowing the stodgy image of the $12 Etch A Sketch, Ohio Art has tried to dress it up, such as making Hello Kitty and Shrek versions.

The company also has shifted toward the electronics and video game trend.

It introduced the ETO this year, a $35 toy that works more like a video game controller without the console.

The device plugs into a television and lets children draw on a TV screen the way they would with a conventional Etch A Sketch. It has features similar to those of a computer drawing or image-editing program.

It, too, has had poor sales, in part because of production delays, Mr. Killgallon said.

"ETO is certainly a disappointment to us," he said. "It's just a great toy. There's so much play with there that I think it's too good of a toy not to be doing better."

But he conceded that the price may be too high. During a Toys 'R' Us promotion this fall for which the toy was priced at $25, it sold very well, he said.

Demand for the once popular Betty Sphaghetty flexible doll has dropped. The doll has literally been shoved off the shelves by competitors, because bigger manufacturers have more clout with stores. Betty is difficult to find, other than at toy liquidators or non-chain stores, Mr. Killgallon said.

"There again, Betty Spaghetty is a toy with tremendous play value," he said. "All the consumer research we do said there's still a position for Betty Spaghetty in the market, but there's only limited shelf space."

He conceded the doll will need to be "reconfigured" for 2006.

Despite its sagging bottom line, Ohio Art, which has its own design and development staff but also uses outside designers, has been willing to spend to develop new products.

In 2000, it put $574,000 into R&D. Last year that figure was $793,000. Research-and-development spending was $341,000 in 2001, $372,000 in 2002, and $502,000 in 2003.

Another new revenue stream for the northwest Ohio firm is Magna Doodle, a toy for preschoolers for which Ohio Art obtained licensing rights this year, but which cannot be found in many common toy outlets.

The company acquired the license in April but didn't start making the toy until August.

These troubles and missteps follow the last fiscal year in which the company's revenues were the lowest in at least a decade, at $28.7 million.

Four years earlier, sales were $54.8 million.

The company lost $447,000 for the fiscal year that ended Jan. 31, after profits of $1.2 million and $3.1 million the previous two years. That $3.1 million was its largest profit in more than a decade; the firm has shown red ink in six of the last 10 years.

Other companies have been able to do better in the recent tough economy, said Mr. McGowan, the analyst.

Jakks Pacific Inc., a Malibu, Calif., toy firm that makes remote-control cars and action figures, is "doing well and they're not that big, so it's not impossible," Mr. McGowan said. The firm had sales of $474 million last fiscal year.

Even though Ohio Art has only about 300 stockholders, the company's shares have suffered this year since the firm's voluntary removal from the American Stock Exchange.

The stock, now traded by over-the-counter pink sheets, has been stuck in the $5.50-to-$7-a-share range in recent weeks. A few years ago, it traded as high as $41 and last year hit a high of $21.

Company leader Mr. Killgallon emits no hint that his firm is on the ropes.

Despite its losses, he said, the company is sound financially and making plans for two years out.

However, he said he wishes this year were better.

"It's the kind of year where the mothers that do the majority of the buying are saying 'There's nothing out there I really have to have and if I wait I get a better price,'●" he said.

To bolster its business, the company agreed last month to sell its Strydel injection-molding business to a Michigan maker of plastic automotive parts. Terms were not announced.

Mr. Killgallon said much of the proceeds will be used for developing toys.

Ohio Art spent $800,000 on designing toys year, 50 percent more than in the year before.

That amount, however, pales in comparison with outlays by major toy manufacturers and means each idea needs to do well or the firm will struggle.

One prospective toy grew out of the ETO product, Mr. Killgallon said

The firm is developing Etch A Sketch-Wired, a $20 toy that plugs into a TV and was well received at an October toy exhibition.

Mr. Silver, of the Toy Book, said Ohio Art will have to do better than that if it wants to be around long term.

"Toys 'R' Us is making a comeback," he said. "I think there's light at the end of the tunnel. But the key for toy firms now is to keep introducing new items. You have to be constantly refreshing yourself."

Ohio Art has opened new possibilities with ETO, but "they have to promote it," Mr. Silver said.

Contact Jon Chavez at:

jchavez@theblade.com

or 419-724-6128.


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