Mattel (MAT) Down 24.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Mattel (MAT). Shares have lost about 24.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mattel due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Mattel (MAT) Posts Narrower-Than-Expected Loss in Q2

Mattel has reported better-than-expected second-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate for the fourth straight quarter. Also, its revenues surpassed the consensus estimate for the third consecutive quarter.

The company reported adjusted loss of 25 cents, which was narrower than the Zacks Consensus Estimate of loss of 35 cents. The second quarter’s loss compared favorably with the prior-year quarter’s loss of 54 cents.

Sales Discussion

Net sales of $860.1 million surpassed the consensus estimate of $821 million and increased 2.3% year over year. On a constant-currency basis, sales grew 5% from the prior-year quarter.

Worldwide gross sales were up 0.8% year over year (as reported) and increased nearly 4% at constant currency. In North America, gross sales increased 1%, both as reported and at constant currency. On a reported basis, net sales from the same region grew 2% year over year.

Meanwhile, in the International region, gross sales increased 3% (as reported), driven by growth in Action Figures, Building Sets and Games (including Toy Story 4 partially offset by Jurassic World), Dolls, and Vehicles. This growth was partially offset by a decline in Infant, Toddler and Preschool (including Fisher-Price Core, and Thomas & Friends).

Further, gross sales increased 9% in constant currency, driven by growth in Action Figures, Building Sets and Games (including Toy Story 4 partially offset by Jurassic World), Dolls, and Vehicles. This growth was partially offset by a decline in Infant, Toddler and Preschool (including Fisher-Price Core, and Thomas & Friends).

Brand-Wise Worldwide Sales

Mattel, through its subsidiaries, sells a broad range of toys. These items are grouped under four wide categories — Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands, and Construction and Arts & Crafts Brands.

As reported, worldwide gross sales at Mattel Power Brands increased 1% to $962.3 million year over year. The metric increased 4% on a constant-currency basis. Also, the Barbie brand witnessed 9% growth as reported and 13% in constant currency, owing to positive POS momentum. Also, gross sales at the Hot Wheels brand increased 5% on a reported basis and 9% in constant currency, courtesy of Hot Wheels' 50th anniversary. At the Fisher-Price and Thomas & Friends brands, gross sales were down 6% as reported and 4% in constant currency. The same at American Girl decreased 23% as reported and in constant currency primarily due to lower sales in proprietary retail and direct channels.

Operating Results

Adjusted gross margin expanded to 39.9% from 30.4% in the year-ago quarter, buoyed by savings from the Structural Simplification program and lower foreign exchange.

Adjusted other selling and administrative expenses decreased 6% to $289.5 million. The improvements were primarily driven by the benefit of Structural Simplification, partially offset by Toys “R” Us bad debt recoveries in the second quarter of 2018.

Balance Sheet

As of Jun 30, 2019, the company’s cash and equivalents were $194.1 million compared with $594.5 million as of Dec 31, 2018. Total inventories as of the end of the second quarter increased 33.1% year over year.

The company’s long-term debt summed $2.855 billion as of Jun 30, 2019, lower than $2.851 billion as of Dec 31, 2018. Shareholder’s equity was $421.3 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -35.06% due to these changes.

VGM Scores

Currently, Mattel has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Mattel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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