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Here's Why a Hold Strategy is Appropriate for Mattel (MAT)

Mattel, Inc. MAT is well-posed to benefit, courtesy of robust Barbie brand and Hot Wheels sales. The company continues to benefit from robust gross billings in North America. Consequently, in the past year, the company’s shares have gained 13.5% against the industry’s decline of 6.2%. However, the coronavirus pandemic and high costs remain concerns for the company. Let’s delve deeper.

Growth Drivers

The Barbie brand continues to instill investor confidence with solid performance. In the second quarter, the Barbie brand’s worldwide gross billings witnessed an improvement of 3% on a reported basis and 7% at cc. Per NPD, Barbie strengthened its position as the number one Global Doll brand in 2021 for the second consecutive year. Meanwhile, the company plans to develop Barbie Fashion Battle, a reality show where designers compete for the chance to create a fashion collection for Barbie. During the second quarter of 2021, the company gave the green signal to a new Barbie feature film and announced the commencement of production in 2022 with a targeted release in 2023.

In 2018, worldwide gross sales for Hot Wheels were up 9% and reached the highest annual sales in its 50-year history. In 2020, worldwide gross sales at the Hot Wheels brand increased 3% on a reported basis and 5% at constant currency. It marked the seventh consecutive year of POS growth globally and in the United States. The company witnessed strong Hot Wheels sales in 2021. During the first and second quarters of 2022, gross billings at the Hot Wheels brand rose 31% and 26% (on a reported basis) and 36% and 31% (at cc) year over year, respectively. The company has been witnessing an improving sales trend for Hot Wheels and is quite confident about the brand’s long-term prospects.

On the other hand, this Zacks Rank #3 (Hold) company is benefiting from robust North American sales. During the second quarter, gross billings in North America surged 30% (as reported and at constant currency) year over year. This can be attributed to an increase in sales of Action Figures, Building Sets, Games, and Other (including Jurassic World and Lightyear), Vehicles (including Hot Wheels), Infant, Toddler, and Preschool (including Fisher-Price and Thomas & Friends) and Dolls (including Polly Pocket and Barbie). Net sales in the North America segment rose 30% year over year on a reported and cc basis.

For 2022, the company anticipates net sales to grow in the range of 8-10% at cc. Adjusted gross margin for 2022 is expected at 47-48%. Adjusted EBITDA for 2022 is expected to be $1,100-$1,125 million, suggesting an increase from the $1,007 million reported in 2021. For 2023, the company anticipates net sales to grow in the high-single digits on a constant currency basis. Adjusted operating income margin for 2023 is expected between 16% and 17% of net sales. For 2023, the company expects the adjusted EPS to be greater than $1.90.

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Hurdles to Cross

Mattel’s second-quarter performance was negatively impacted by the coronavirus pandemic. Supply chain disruptions due to the pandemic affected the company. In China, the company’s sales were affected by COVID-related retail closures during the second quarter of 2022. The coronavirus pandemic and other macroeconomic uncertainties might negatively impact the company’s performance in the days ahead.

Moreover, high costs are hurting the company’s performance. During the second quarter, cost inflation hurt the company’s operations due to a rise in raw materials prices. During second-quarter 2022, adjusted gross margin contracted 260 basis points year over year to 44.9% due to input cost inflation, other supply chain costs, and increased royalty expense, which was overshadowed by pricing, favorable fixed cost absorption, and savings from the Optimizing for Growth program.

Key Picks

Some better-ranked stocks in the Consumer Discretionary sector are Hyatt Hotels Corporation H, Marriott International, Inc. MAR and Choice Hotels International, Inc. CHH.

Hyatt currently carries a Zacks Rank #2 (Buy). H stock has increased 36.1% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for H’s current financial year sales and EPS indicates growth of 78.1% and 93.9%, respectively, from the year-ago period’s reported levels.

Marriott currently carries a Zacks Rank #2. MAR has a trailing four-quarter earnings surprise of 1.4%, on average. The stock has increased 25.9% in the past year.

The Zacks Consensus Estimate for MAR’s current financial year sales and EPS indicates growth of 44.6% and 93.7%, respectively, from the year-ago period’s reported levels.

Choice Hotels carries a Zacks Rank #2, at present. CHH has a trailing four-quarter earnings surprise of 20.4%, on average. The stock has increased 6.4% in the past year.

The Zacks Consensus Estimate for CHH’s current financial year sales and EPS indicates growth of 13.6% and 17.7%, respectively, from the year-ago period’s reported levels.


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