Bear of the Day: Mattel (MAT) - Bear of the Day

By Zacks | July 28, 2014 AAA

It has been extremely rough as of late for some toymakers as the world goes increasingly digital. Companies are now forced to find tie-ins to movie or TV franchises in order to keep their brands in the public eye and boost sales.

Some companies in this space have been successful lately with this strategy, such as Hasbro (HAS) and their Transformers brand. Others, however, have struggled to do this and are also seeing their more ‘traditional’ toys fall by the wayside too. This is especially the case for a classic toy company which is going through an extremely bad rough patch, Mattel (MAT).   

Mattel in Focus

Mattel was founded in 1945 and is headquartered in Segundo, California. The company has a ton of world famous brands including Fisher-Price, Hot Wheels, and of course, Barbie. While the stock was a strong performer in years past, consumers seem to be tiring of many of the firm’s all-star brands in recent years, leading to many questions about how Mattel can revive interest in its products.

These worries are especially prevalent following the company’s most recent earnings report. The company saw extremely weak revenue figures across a number of segments, leading to a huge earnings miss of over 84%.

Recent Earnings

In particular, Mattel saw a 17% decline for Fisher-Price Brands,  while Mattel Girls & Boys Brands declined 13% (year-over-year). The main culprit for this decline was easily the Barbie brand—which is in the Mattel Girls & Boys Brands segment—as this declined 15%. And thanks to this decline, sales for Barbie have fallen in eight of the last 10 quarters, further underscoring that this isn’t a one quarter speed bump.

If that wasn’t enough, investors should also note that gross margins were also an issue for MAT in the most recent quarter. Margins were down 490 basis points to 46.4%, while operating profits barely squeaked by into the green, sparing MAT from having two quarters of losses in a row.

Estimates & Analyst Opinion

This earnings miss actually marks the third straight miss for MAT. And it isn’t like Mattel is just barely missing expectations either, as each of these misses have been by double digits, while the past two (including the most recent one) were misses of at least 84%.

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Given these factors and the declining sales trends for many of its key brands, analysts have had no choice but to cut their earnings estimates for MAT stock. In fact, not a single estimate has gone higher in the past sixty days for either the current year, next year, or current quarter time periods.

The magnitude of these estimate cuts have also been pretty severe, as MAT is now expected to earn just $1.02/share today for the current quarter, down from $1.17/share 30 days ago. Meanwhile, for the current year, estimates have fallen from a $2.47/share consensus 60 days ago to a $2.17/share consensus today, pushing MAT’s projected growth rate to a contraction of nearly 16% year-over-year.

For these reasons, it shouldn’t be too surprising to note that MAT currently has a Zacks Rank #5 (Strong Sell), and that we are looking for more underperformance from this stock in the months ahead.

Other Picks

If you want to stay in the toy/game industry though, there are a handful of better ranked picks out there. Hasbro, for example, currently has a Zacks Rank #2, and may be better positioned thanks to the revival of many of its brands.

Beyond that, there are a number of game studios such as Take-Two Interactive (TTWO) or Electronic Arts (EA) which both receive ‘buy’ ranks. Either of these would also help investors to go more along the digital route in the toy/game industry, and potentially avoid some of the main problems that MAT is facing, and struggling with, right now.

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