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Bear of the Day: Mattel (MAT)

Ryan McQueeney
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The retail industry has seen its fair share of near and full-blown casualties over the past several years, but perhaps no brick-and-mortar bankruptcy has been greater than that of Toys ‘R’ Us. What’s worse, the liquidation of Toys ‘R’ Us has had a negative effect on some of the iconic brands it carried, including Mattel, Inc. (MAT).

Mattel is one of the world’s largest manufacturers of toys. Its family of brands includes Barbie, Hot Wheels, Matchbox, American Girl, Fisher-Price, and more. These iconic toy lines obviously still carry plenty of clout in the industry, but recent headwinds make MAT look like a stock to avoid for now.

Investors should also note that these headwinds have led to negative analyst sentiment and downward earnings estimate revisions, which has earned the stock a Zacks Rank #5 (Strong Sell). Plus, there’s probably a few other reasons to be bearish on MAT right now. Let’s take a closer look.

Latest Earnings and Outlook

Mattel most recently reported earnings on April 26. For that period, Mattel reported an adjusted loss of 60 cents per share, which was much wider than the consensus estimate of a 39-cent loss. In the prior-year quarter, Mattel saw a loss of 32 cents per share.

Mattel’s Q1 2018 results were significantly affected by the Toys ‘R’ Us bankruptcy, and management said it expects this to continue being an issue in the near term.

The company’s next earnings report is expected to be released after the market closes on July 25. For this second quarter, the Zacks Consensus Estimate is calling for Mattel to report an adjusted loss of 31 cents per share. This would mark a year-over-year decline over more than 121%.

Looking out a bit further, the Zacks Consensus Estimate for Mattel’s full-year 2018 earnings currently sits at -$0.55 per share, and this figure has been trending downward. In fact, three negative revisions over the past 60 days have dragged this projection down about three cents.

This negative revision activity has earned the stock a #5 (Strong Sell), but as mentioned, there are a few other reasons to be hesitant about MAT right now.

Reasons for Concern

Part of the underlying issue for Mattel is tighter retail inventory management. This put a huge dent on the company’s Q1 sales and is expected to continue being a headwind going forward. Add this to marketing and promotional costs, as well as cost associated with developing digital platforms, and it’s no surprise that Mattel's margins are under pressure.

Another issue to be aware of is a broader problem throughout the toy industry. Unfortunately for these traditional brands, the advent of video games, MP3 players, tablets, and smartphones has grabbed the attention of their core audiences.

This would only hurt so much if Mattel could respond with strong product innovation and design. But that’s not really something we’ve seen from Mattel lately—although the company’s recent renewed commitment to building core brands like American Girl, Barbie, and Fisher-Price might be a long-term catalyst.

Mattel suspended its dividend at the end of 2017, and there’s not been many positive signs since then. Simply put, there are too many questions about the company’s near-term earnings outlook and broader industry trends for investors to want to dive into this stock right now.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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