On Dec 5, 2014, we issued an updated research report on Mattel, Inc. (MAT).
On Oct 16, 2014, Mattel reported weak third-quarter 2014 results with earnings and revenues missing the Zacks Consensus Estimate for the fourth time in a row. Adjusted earnings of 98 cents per share declined 15.5% year over year owing to weak sales and lower margins. Net sales of $2.02 billion also declined 8% year over year, primarily reflecting poor performance in the domestic as well as international markets.
Sales of flagship brands like Barbie and Fisher-Price have been soft since 2013 due to a weak demand due to sluggish consumer spending environment. Customers are reducing their non-essential purchases, and purchasing only products that they need. We believe an increasing inclination of kids toward electronically driven devices has also lowered the demand for traditional products like building blocks that Mattel makes. In fact, the company has posted sluggish results consistently over the past few quarters owing to the weak demand for traditional toys.
Moreover, the loss of the Disney rights to Hasbro Inc. (HAS) keeps us on the sidelines. At present, Mattel holds the profitable rights to develop dolls based on The Walt Disney Company's (DIS) characters from the animated movie Frozen.
However, per a new deal signed in Sep 2014, Hasbro has been given the rights to manufacture these dolls beginning 2016, worldwide, except in Japan. Though Mattel remains a major entertainment partner of Disney on a number of Boys and Infant Preschool properties, the loss of these rights have compounded the company’s woes.
The partnership with Disney had been a savior for Mattel so far. Strong sales of the Frozen line of products helped the company to somewhat mitigate the weak performance of Barbie dolls in the recent quarters. The company is likely to lose a substantial chunk of revenues, especially at a time when the toy maker is battling intense competition as a result of increasing popularity of electronic and mobile games.
Notably, the company plans to increase marketing and advertising spending in the fourth quarter of the year. Though this would aid revenues to some extent, it would dent profitability. Meanwhile, efforts to lower inventory would further increase costs, thereby putting pressure on margins.
However, the company is focusing on improving its point of sale with the help of a number of initiatives which would offset the woes to some extent. These include brand innovation and strategic initiatives like entering new categories, working on the digital front and focusing on better execution of marketing and promotional initiatives. Meanwhile, the company remains focused on achieving cumulative cost savings, going forward, thus enhancing margins.
Mattel presently has a Zacks Rank #5 (Strong Sell). Take-Two Interactive Software Inc. (TTWO) is a better-ranked stock in the same sector with a Zacks Rank #2 (Buy).