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TWST: What are the reasons why some of the sectors have performed so poorly?

Ms. Krutick: I think there have been some company-specific issues, some general industrywide concerns, and subsector issues. Industrywide, you’ve seen a marginalization of certain types of leisure activities, where consumers are trading up to doing other things. They’re not spending as much time cruising, buying toys or engaging in camping or other recreational activities because people have a finite amount of time and money. Despite a strong economy, you’re simply seeing more traditional forms of leisure activities become less popular as people are spending more time on the Internet, on the computer, playing with their children or doing other things. It might be a function of people trading up to more expensive leisure activities since they feel a little bit wealthier. In the cruise industry, we believe customers of mid-priced cruise companies upgraded to more upscale cruises and destination travel options. The newest ships are increasingly elaborate with activities like ice skating and rock climbing. The toy industry has witnessed a lull in demand for reasonably priced traditional toys, as children opt for more expensive electronic toys like video games and interactive toys. Toy makers are responding with new initiatives (such as online game playing). But startup costs associated with these ventures are crimping near-term earnings growth. In addition, moves into electronics have been hindered by chip shortages, which is limiting the supply of the most popular toys during the holidays. So the more traditional and perhaps more value-oriented parts of the equation have been affected.

TWST: What’s the outlook going forward as we move into 2001? What effect will a slowing economy have on this sector?

Ms. Krutick: Given the very poor performance we’ve had in 2000, I’m ever more hopeful that 2001 will be a better year for the leisure group. I feel that way partly because there are some extraordinary values that can be had in the sector, and partly because if we do have a soft landing, much of this is already factored into the stocks. I think consumers are going to be trading down to more value-oriented leisure time options: i.e., cruises, traditional toys.

TWST: What about Hasbro (NYSE:HAS)? I’m looking at a report of yours from February 2000, and at that point you considered Hasbro to be better positioned than Mattel (NYSE:MAT).

Ms. Krutick: A lot has changed since February. Mattel has a new management team, and Hasbro has seen its key item for 2000 — Pokémon — wane in popularity in the US market. Hasbro, ironically, has been burned very badly for having two back-to-back blockbuster licenses, Star Wars and Pokémon. Hasbro found it treacherous to predict the demand for these hot licenses, and as a result, earnings expectations have come down dramatically. Hasbro has also announced a major restructuring plan as the Star Wars/Pokémon pressures highlighted the fact that the company had an inflexible cost structure. In addition, Hasbro is facing issues related to their interactive businesses for which they are evaluating strategic options. Hasbro is going through a transition period, and without a clarification of the fallout from the Pokémon slowdown at retail and the potential inventory pressures that may ensue, we think it’s more appropriate to carry a Neutral stance on Hasbro.