Gevork Sarkisyan

Executive Summary
Tonka Corporation

The name Tonka brings back many childhood memories for a vast majority of people in this class. The word has become synonymous with its signature yellow trucks. Nevertheless, Tonka is much more than the toy truck that we all grew to love. Mound Metalcraft was created in 1946 in the small town of Mound, Minnesota by Lynne E. Bake, Avery F. Crouse and Alvin F. Tesch. The first products produced by the young company were two versions of a metal tie rack, and the founders had originally planned on manufacturing garden equipment. The former occupant of their building, Streater Company, had made and patented several toys. Mr. Streater was not interested in the toy business and approached the three men at Mound Metalcraft. The three men at Mound Metalcraft thought they might make a good side business to complement their other products. After some slight modifications to the design by Alvin Tesch and the addition of a new logo, the word Tonka, which means “great” or “big”, was born and the company began selling metal toys. Soon enough, this became their primary business and in 1955 the company changed their name from Mound Metalcraft to Tonka Incorporated.

Fast-forward 30-years, Tonka had become the 5th largest toy company in the United States with sales exceeding 293 million a year and net profit of 22 million, which was unprecedented in the toy industry at the time. In 1983, the top five toy companies in the United States were responsible for 32.7 % of total sales. By 1986, that number had reached 44.2 %. Nonetheless, capturing market share was no easy task, with over 800 toy companies in the United States. Only the largest of these toy companies were able to minimize sales and profit volatility through diversification of their product lines. Unfortunately, each company’s profits rose and fell with the success or failure of its latest products, with it’s biggest hits only having a average product life cycle of two to three years. Tonka’s main competitors were Coleco, Hasbro, Mattel and Kenner Parker. In 1986, despite having the lowest sales of the four larger competitors, Tonka’s produced a net income of 22.3 million, second only to Hasbro (99.2 mill), which was the largest toy company in the United States at the time. With the exception of games, puzzles, plush toys, and infant toys, estimated 1986 sales were down by as much as 25%. The overall industry was down over 27 million as a whole, with basic and technologically enhanced toys showing the best results.

Tonka Corporation was best known for its traditional line of sturdy metal toy trucks, bulldozers, backhoes, and construction vehicles, which were responsible for approximately $70 million of sales in recent years. However, over the past several years, the company had begun to diversify into other products that would be more appealing to younger girls. One of the more successful toys for Tonka over the past years was GoBots, which were small toy vehicle that could transform into action figures. These directly competed with Hasbro’s Transformers, which generally outsold the GoBots. GoBots contributed about $132 million in sales in 1985, or about 54% of Tonka’s total sales. The following year unfortunately, only $25 million worth were sold, despite over 40 new characters being introduced. Even more successful were the Pound Puppies plush toys, which appealed to a broader age range and to all genders. In 1985, Pound Puppies contributed $34 million in sales and $156 million in 1986, over 53% of total sales.

As a result of these successful toys coupled with its non-volatile sales of its toy trucks, Tonka’s sales rose from $81 million in 1982 to $293 million in 1986. From 1982 to 1986, Earnings per share for Tonka rose from $0.12 per share to $3.04, despite a stock offering of 1.1 million shares in 1986. Return on assets also doubled from 1984 to 1986, and the return on equity rose from 16.7% to 28.8%. Current ratio also rose from 1.66 in 1985 to 2.52 in 1986, indicating strong liquidity from the company. Strong liquidity stemmed from its strong sales and its 1.1 million stock offering in 1986, which netted the company $22 million or $20.27 per share. Tonka had total debt of $8.2 million in 1985 and $51.3 million in stockholders equity.

According to the CEO and President, Stephen Shank, Tonka faces many obstacles and challenges ahead. For one, Tonka’s performance is too dependent on the success of a single line of products (GoBots in 1985 and Pound Puppies in 1986). Tonka’s challenge is to expand its base of stable toys not just cyclical ones. Each year, Tonka reviews about 3000 to 4000 new toys ideas. In 1987, its hopes were pinned on Pound Puppies, which had record sales the year prior, its traditional line of trucks, and nine other toy lines. The company’s main objective is to increase the products line to a point where no single product would account for more than 25% of its sales. Another challenge facing Tonka is to build a larger footprint internationally, where their market share is much smaller than it is in the U.S. The estimated 5 billion dollar toy market in other developed countries outside of the US was witnessing more penetration by U.S Company’s. In most of these developed markets, non-U.S. companies tended to be much smaller and therefore had a fewer strong brands and weaker marketing campaigns.

Tonka’s goal is to build international sales to 30% of consolidated revenues compared to 11% in 1986. These markets include Canada, the United Kingdom, Australia, and other major markets. This vision became somewhat of a reality in 1986 when Tonka began to introduce other products in addition to its traditional line of trucks internationally, with the goal of having most of its toys available by 1987. In order to be successful, Tonka must determine the financial results of different degrees of debt/capital leverage.