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Mattel Kept Neutral Despite Weak Q2

Zacks Equity Research

We reiterate our long-term Neutral recommendation on world’s leading toy manufacturer, Mattel, Inc. (MAT), despite its poor second-quarter 2013 performance as we believe it has sound long-term fundamentals and potential for growth in future quarters.

Why the Reiteration?

Mattel posted dismal second-quarter 2013 results wherein both earnings per share and revenues missed the Zacks Consensus Estimate. Mattel’s second-quarter 2013 adjusted earnings of 21 cents per share declined 25% year over year and also lagged the Zacks Consensus Estimate of 32 cents by 34.4%. Sluggish sales growth and higher overhead expenses pressurized earnings during the quarter.

While net sales nudged up only 0.9% year over year to $1.17 billion, it missed the Zacks Consensus Estimate of $1.21 billion by 3.3%. Despite a healthy show by The American Girl and Monster High brands, persistent sluggishness in Mattel’s powerhouse brand, Barbie, and dismal performance by Fisher-Price brands led to weak quarterly results.

Moreover, the difficult consumer spending environment continues to affect toy manufacturers, like Mattel. The Euro-zone debt crisis further added to the woes.

Despite these aforementioned concerns, we believe the Zacks Rank #3 (Hold) comapny with its strong product line-up and attractive product associations with entertainment companies remains well positioned for future growth. It is considered as the market leader in the doll category, one of the fastest growing segments in the U.S. toy market.

Mattel’s growing Girls category, which accounts for 40% of the company’s total revenue, has been exhibiting solid growth momentum for the past fifteen quarters. We believe the segment’s diversified products should bode well for the company’s business.

Moreover, Mattel has a strong exposure in the international market, especially in Latin America, Eastern Europe and Asia. In the past nine out of 10 quarters, Mattel has registered positive revenue growth internationally. 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. Under the program’s second cost-savings campaign – Operational Excellence (:OE) 2.0 – Mattel recorded cumulative cost savings of $187 million by the end of 2012, exceeding the original target of $150 million. The company has also started a third cost-savings campaign – OE 3.0 – to deliver $50 million in gross savings in 2013. We expect the cost controlling measures to boost the company’s bottom line, going ahead.

Other Stocks to Consider

Some other companies that are currently doing well include MTR Gaming Group, Inc. (MNTG), Activision Blizzard, Inc. (ATVI) and Take-Two Interactive Software Inc. (TTWO). While MTR Gaming and Activision Blizzard carry a Zacks Rank #1 (Strong Buy), Take-Two Interactive carries a Zacks Rank #2 (Buy).

Read the Full Research Report on MAT

Read the Full Research Report on ATVI

Read the Full Research Report on TTWO

Read the Full Research Report on MNTG

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