The Cabbage Patch Kids get a makeover

BusinessWeek
Cabbage Patch Kids
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Courtesy Jakks Pacific, Inc.

In the early 1980s, Cabbage Patch Kids dolls were so popular they drove some moms to fisticuffs as they scrambled to score one of the yarn-haired moppets for their daughters. Barely a decade later the dolls had fallen victim to the toy industry’s perennial challenge: winning a new crop of fans every few years when kids outgrow their toys. Now Jakks Pacific (JAKK), the toymaker that holds the rights to the Cabbage Patch franchise, says it can reinvigorate the brand by linking it to products better known by today’s girls.

Cabbage Patch Kids will begin hitting stores later this year sporting new outfits and wearing Twinkle Toes, a popular line of sneakers from Skechers USA (SKX) that sparkle and light up. Twinkle Toes have been Skechers’s top-selling kids’ line since their introduction in 2008. Jakks also is in talks to sell the $34.99 dolls in Skechers stores, helping to make up for a shrinking number of toy shops and toy departments in the U.S. The shoes are “bringing Cabbage Patch into today’s era,” says Stephen Berman, Jakks’s chief executive officer.

Some analysts call the brand’s longevity a plus. The Cabbage Patch era spans multiple generations, so there’s lots of nostalgia and a built-in fan base that makes it a less risky bet for chains such as Wal-Mart Stores, says Needham analyst Sean McGowan. “It’s in that golden zone because parents and grandparents now remember it,” he says.

The Skechers deal is part of a broader strategy to expand Jakks’s distribution and diversify as the toy industry changes. Retail chains such as Target are shifting more square footage to groceries, leaving less room for dolls and action figures. So Jakks, long a force in licensed toys, is trying to sell more products beyond the toy aisle. It has a pets division that makes dog treats and fake mice for cats. Another subsidiary makes Halloween costumes for kids and adults, and a unit called Funnoodle sells those bendable foam pool toys.

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Courtesy Jakks Pacific, Inc.

Courtesy Jakks Pacific, Inc.

Jakks last year started a line of play sets called miWorld that are dollhouse-size versions of retail stores popular with young girls. Claire’s Stores, a chain of accessory and jewelry shops that’s a go-to mall destination for ’tweens, and ice cream purveyor Dairy Queen Stores were among the first to sign on to the idea. Soon there will be a play set that mimics a Skechers store. The stores earn royalties on products that include their brand.

The strategy has helped Jakks’s sales rebound after falling for five straight years because of product flops and the loss of a license to sell World Wrestling Entertainment (WWE) goods. In 2012 the company also fended off a takeover bid from private equity firm Oaktree Capital Management. Revenue sank 30 percent from a peak of $903.4 million in 2008, to $632.9 million last year. Sales have risen in the past two quarters, and analysts project a third straight gain, partly due to Jakks’s license for Walt Disney’s (DIS) Frozen. It sells dolls, dresses, and wigs based on the hit film.

When Cabbage Patch Kids first caught fire more than three decades ago, creator Original Appalachian Artworks and its founder Xavier Roberts tapped into kids’ nurturing instinct by including adoption papers and birth certificates with each one. At Cabbage Patch’s peak in 1985 the brand generated about $600 million in annual sales for Coleco Industries. Revenue declined from there, and the license bounced among Hasbro (HAS), Mattel (MAT), and Toys “R” Us before landing at Play Along Toys, which Jakks acquired in 2004.

Jakks won’t say how big the brand is now. Needham’s McGowan estimates it has annual sales of as much as $50 million. While that’s less than 10 percent of Jakks’s revenue last year, it’s impressive given the Cabbage Patch Kids’ age, McGowan says. “Just because something was big doesn’t mean it will stick around,” he says. “He-Man isn’t around, and it was just as big and from the same era.”

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