We remain Neutral on leading toy manufacturer Mattel, Inc. (MAT) despite strong third quarter results due to the tough retail environment which curbs consumer discretionary spending.
On Oct 16, 2013, Mattel reported strong third-quarter 2013 results wherein both earnings and revenues beat the Zacks Consensus Estimate.
.While net sales increased 6.2%, earnings per share grew 11.5% year over year. An increase in international as well as domestic sales, along with margin expansion led to the earnings growth. Apart from the consistently strong performances by The American Girl and Monster High brands, the turnaround of Barbie — the company’s powerhouse brand — in the third quarter was noteworthy.
Overall, we remain encouraged by Mattel’s strong product line-up, which includes core brands, licensed brands and lucrative product associations.Mattel’s Girls category, accounting for nearly 40% of the company’s total revenue, has been exhibiting solid growth momentum for the past 16 quarters.
We believe the segment’s diversified products should bode well for the company’s business. Fisher-Price Brands, once a weak link, showed some traction third-quarter 2013 and is expected to sustain the momentum through several product launches in the ensuing quarters.
The Zacks Rank #3 (Hold) company’s international business is growing at a rapid pace especially in Latin America, Eastern Europe and Asia. In the long term, management expects to derive 60% of its sales from the international business.
On the profitability front, Mattel is consistently saving costs under the 2008 Global Cost Leadership Program. Mattel recorded cumulative sustainable cost savings of $187 million by the end of 2012 in its second cost-savings campaign -- Operational Excellence (:OE) 2.0 -- exceeding the original target of $150 million. The company has also started a third cost-savings campaign -- Operational Excellence (:OE) 3.0 -- to deliver $50 million in gross savings in 2013. Year-to-date, Mattel has recorded $34 million in cost savings. We expect the cost controlling measures to boost the company’s bottom line, going ahead.
Despite such positives, we remained concerned about the limited consumer spending environment amid sluggish economic growth in the U.S. The Euro-zone debt crisis also added to the woes.
Moreover, toy manufacturers have been highly affected by the age “compression” which is causing children to grow up faster. In addition, these companies are facing stiff competition from the manufacturers of a broad array of alternative modes of entertainment including video games, MP3 players, tablets, smartphones and other electronic devices.
Other Stocks to Consider
Investors interested in the toy industry may consider stocks like Activision Blizzard, Inc. (ATVI), Glu Mobile, Inc. (GLUU) and JAKKS Pacific, Inc. (JAKK). All these stocks carry a Zacks Rank #2 (Buy).