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Mattel (MAT) Rallies on Q4 Earnings & Sales Beat, Margin Rises

Zacks Equity Research

Mattel, Inc. MAT has reported better-than-expected fourth-quarter 2018 results, wherein the bottom line surpassed the Zacks Consensus Estimate for two straight quarters. Also, the top line surpassed the consensus estimate after lagging in two consecutive quarters.

However, the big take away from the quarter under review was an increase in Barbie sales and higher operating margin. Following the quarterly results, shares of the company have increased 17.8% in after-hours trading on Feb 7. So far this year, the company’s shares have gained 23.7% against the industry’s 1.5% decline.

Adjusted earnings were 4 cents per share, outpacing the Zacks Consensus Estimate of loss of 11 cents. In the prior-year quarter, Mattel incurred adjusted loss of 72 cents per share. Sharp increase in earnings was primarily driven by the company’s cost-saving initiatives.

Sales Discussion

Net sales of $1,524.3 million surpassed the consensus estimate of $1,418 million but declined 5.4% year over year. This underperformance can be attributed to Toys ‘R’ Us liquidation and slowdown in China operation. On a constant-currency basis, sales decreased 3% from the prior-year quarter. Notably, Toys ‘R’ Us liquidation and slowdown in China operation negatively impacted sales by 8% and 2%, respectively.

Worldwide gross sales were down 11% year over year as reported and 9% at constant currency. In North America (including the United States, Canada and American Girl), the metric declined 10%, both as reported and in constant currency, due to a negative impact of Toys "R" Us liquidation. On a reported basis, net sales from the same region increased 6% year over year.

Meanwhile, in the International region, gross sales declined 7% as reported and 2% in constant currency due to a 4% impact of the slowdown in China business and a 3% impact of the Toys "R" Us liquidation.

Brand-Wise Worldwide Sales

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

Power Brands

As reported, worldwide gross sales at Mattel Power Brands decreased 6% to $1.2 billion year over year. The metric declined 3% on a constant-currency basis. On the flip side, the Barbie brand witnessed 12% growth as reported and 15% in constant currency, owing to positive POS momentum. Also, gross sales at the Hot Wheels brand increased 9% on a reported basis and 12% in constant currency, courtesy of Hot Wheels' 50th anniversary. At the Fisher-Price and Thomas & Friends brands, gross sales were down 17% as reported and 15% in constant currency. The same at American Girl decreased 27% as reported and in constant currency.

Toy Box

In the fourth quarter, worldwide gross sales at Mattel Toy Box brands (Owned Brands and Partner Brands) were $519 million, down 21% as reported and 19% on constant currency. The same at Owned Brands decreased 17% as reported and 15% in constant currency due to lower sales at MEGA products. Meanwhile, at Partner Brands, the metric declined 25% as reported and 23% at constant currency due to lower sales of CARS products, partially offset by initial sales of Jurassic World products.

Mattel, Inc. Price, Consensus and EPS Surprise


Mattel, Inc. Price, Consensus and EPS Surprise | Mattel, Inc. Quote

Operating Results

Adjusted gross margin expanded to 46.6% from 32% in the year-ago quarter, buoyed by Structural Simplification savings and lower inventory expenses, partially offset by a negative 350 basis point impact of labor and raw material cost inflation.

Adjusted Other Selling and Administrative Expenses increased by $3 million year over year, primarily due to incentive compensation, partially offset by Structural Simplification cost savings.

Balance Sheet

As of Dec 31, 2018, the company’s cash and equivalents were $594.5 million compared with $1,079.2 million as of Dec 31, 2017. Total inventories as of the end of 2018 decreased 9.6% year over year.

The company’s long-term debt summed $2.85 billion as of Dec 31, 2018, lower than $2.87 billion as of Dec 31, 2017. Shareholder’s equity was $669.5 million.

Glimpse of 2018 Results

For 2018, net sales were 8% as reported and 7% in constant currency. Gross Sales were down 8% as reported and 7% in constant currency, reflecting a negative 6% impact of the Toys "R" Us liquidation and a 2% impact of slowdown in the China business. Adjusted operating loss was $115 million, marking an improvement of $92 million from the prior year. Adjusted loss per share was $1.14 in 2018, an improvement of $0.07 from the prior year.

Zacks Rank & Stocks to Consider

Mattel currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry include Nintendo NTDOY, Take-Two Interactive Software TTWO and JAKKS Pacific JAKK. While Nintendo and Take-Two Interactive Software currently flaunt a Zacks Rank #1 (Strong Buy), JAKKS Pacific carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nintendo, Take-Two Interactive Software and JAKKS Pacific’s earnings for 2019 are expected to increase 37.1%, 78.4% and 74.2%, respectively.

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