What's in the Cards for Topps?

The fabled maker of baseball cards and bubble gum has struggled of late. Some analysts see a sale in the offing

By Mira Serrill-Robins

Baseball may be the national pastime. But as Topps (TOPP ) has discovered, having a close association with one of America's great passions is no longer enough to guarantee strong growth.

It has been a disappointing year for the legendary maker of sports cards and bubble gum. Its 2006 first-quarter results, posted June 28, showed a 10% drop in net sales year-over-year, from $88.1 million in last year's first quarter to $78.9 million this year.

The entertainment division -- maker of cards and collectibles -- suffered a 20.6% fall in sales, to $34.8 million. Topps's confectionery division, which includes Bazooka, Ring Pop, and Baby Bottle Pop, turned in a better performance, with sales off only 0.4%. But overall, Topps's first-quarter net income fell 78% from last year, to $897,000.


  Small wonder that, on the eve of the Major League Baseball All-Star break, speculation is rife that Topps may be headed for the auction block. Earlier this year, it hired Lehman Brothers to analyze the financials and make recommendations about its future.

Executives insist Topps isn't for sale yet, but that hasn't stopped analysts from buzzing over what may happen. On June 20, Jim Barrett of CL King & Associates raised Topps stock from neutral to strong buy, arguing that the Brooklyn (N.Y.) company, founded in 1938, will likely be sold in its entirety.

Chairman and CEO Arthur Shorin "is at the age [69] where he may be thinking of retiring, and he owns 7% of the stock," Barrett says. "The shareholders would like to see the company sold, especially given the fact that its earning performance is very weak. And if it's not sold, the stock is likely to go down very significantly." The report sent Topps stock to a 52-week high of $11.18. It closed at $10.25 on July 11.


  Barrett speculates that confectioners such as Hershey (HSY ), Tootsie Roll (TR ), and Wrigley (WWY ) would be interested but might then sell off Topps's three entertainment sections. According to Jefferies & Co. media and entertainment analyst Robert Routh, potential buyers for the Topps entertainment branches could also include 4Kids Entertainment (KDE ), a sporting-goods company such as Rawlings or Spalding, or even Marvel Comics (MVL ).

However, Routh thinks a more likely scenario is that Topps will sell its confectionery operation and take the entertainment part private again. "The two sides of the company, confectionery and entertainment, have different investor bases. The management is great, it's a great company, and its products are American staples."

While most Americans associate Topps with classic baseball cards that come with a stick of bubble gum, the company attributes its particularly sluggish sales in the latest quarter to there being no European Cup in soccer this year (held every four years, the next tournament is in 2008). It was also hurt by the cancellation of the National Hockey League season due to a labor dispute. Topps markets hockey cards under the Bowman and O-Pee-Chee brands.


  This year has also seen lower earnings because of legal fees incurred during a proxy fight with shareholder Pembridge Capital Management (which was later dropped) and a $2 million settlement with Media Technologies, which accused Topps of taking its idea for memorabilia cards that come with a piece of the pictured player's uniform or bat.

Topps Chief Operating Officer Scott Silverstein sounded a warning at the beginning of the year. He told analysts during a Jan. 6 conference call that an unnamed consulting firm hired by Topps to conduct a strategic review of the U.S. business found that sports-card sales had been declining by 15% annually over the last five years, now amounting to about a $300 million wholesale market.

Why the decline? Barrett of CL King points to changing tastes and technology's distractions. "The main reason...is that the core collector -- the young boy -- is out playing video games instead of buying sports cards," says Barrett. "The industry exacerbated that phenomenon because they put out too many different series of cards, and packs were expensive, at least $4 a pack." By Mira Serrill-Robins


  Tracy Hackler of Beckett Media, which publishes magazines on sports collectibles, thinks a sudden influx of investment-minded card collectors in the 1980s also is to blame. They quickly abandoned collecting when they sensed poor profit opportunities, and that hurt sales, Hackler figures. "For the 50 years [prior to the boom], collecting cards was almost entirely a pursuit of passion," says Hacker. Then, in the '80s, "it became a get-rich-quick scheme. The number of manufacturers and cards multiplied, then almost as quickly as those people came in, they left."

Analyst Dennis McAlpine of McAlpine Associates agrees. "There were too many competitors making too many cards available, so the value of cards in the aftermarket started going down, the prices started going down, and collectors started getting out. Only kids were left, and then the cards were probably overpriced for the kids."

Yet, Beckett Media's Hackler thinks the market may still rebound. "Kids are a definite growth market for trading cards. You also have sports fans in general who may have never collected. It's just a matter of finding something that resonates with them."


  Jefferies analyst Routh believes Topps has some valuable brands and trademarks that it could license to partners such as sports-equipment makers, creating new revenue streams. He cites the well-known Topps brand as a crown jewel. "Licensing it to various manufacturers would be a noncapital-intensive, risk-averse way to generate revenue." Licensing has worked well for companies like Marvel and Playboy (PLA ), Routh adds.

Topps's entertainment divisions have made some innovative and successful moves in recent years, most analysts agree. Its WizKids unit, acquired in July, 2003, has performed well with the sale of collectible strategy games. Its nonsports card sales, including Pokémon, Star Wars, and Operation Desert Storm cards also have helped to make up for some of the sports-card shortfalls.

In October, 2001, Topps launched etopps.com, where people buy only the cards they want from among as many as 2,000 offered each week at prices ranging from $3.50 to $9.50. Buyers keep the e-cards in their portfolios, and can play various online games against other players, either just for fun or using cards as bets.


  Analyst McAlpine says so far, etopps is more or less breaking even, but Routh believes that making card-buying interactive and more exciting is a good way of adjusting to the new market environment and could eventually increase the market for sports cards.

Topps could also get a boost from the return of hockey and the World Baseball Classic, a baseball tournament of teams from around the world to be held next March.

Routh points out that Topps has virtually no debt, with $92.9 million in cash and assets on hand. He believes the entertainment side could do well on its own. Barrett cites the Pokémon tide of five years ago, which provided Topps with a quick shot in the arm.


  Although Topps and its products have been staples in American culture for decades, its bubble gum has been hit by increasing concerns about health issues and retailer consolidation, and its entertainment products are hurting in the wake of ever-increasing competition for play time. Still, "it's not your father's trading-card business any more," says Beckett Media's Hackler. "It's still very cool, and it's still fun, it's still an important part of Americana."

With a few strategic adjustments, such as expanding its online entertainment alternatives and leveraging its long history and trusted brand name better, analysts agree that Topps may still have a prosperous future.

Serrill-Robins is a BusinessWeek Online intern in New York