Leading U.S. toymaker Mattel, Inc. MAT has been facing multiple headwinds such as sluggish performance by certain segments and brands, negative currency translation and sluggishness in the U.S. retail toy market. Moreover, the Toys 'R' Us bankruptcy ado has added to the woes.
Major Brands’ Performance Lack Luster
Persistently sluggish performance by certain key brands has been a major drag. At the Mattel Girls & Boys Brands, performance of the Other Girls brand has been a concern for long owing to declines in Monster High and Ever After High sales. Sales at the iconic Barbie brand also declined in the last two quarters. Though the brand had posted positive sales in the past three quarters, its sales have been mostly soft since the beginning of 2013 owing to stiff competition from other fashion dolls.
Meanwhile, though the company began 2017 with expectations of mid-to-high single digit growth in the top line, it is now targeting low single-digit sales growth. The main reason behind this tweaked guidance is expected lower sales for Thomas, American Girl, and MEGA brands.
Although the company is making important changes this year in these brands, it will take some time for them to gain momentum.
Weakness in Toy Market & Other Concerns
The overall U.S. retail environment for toys is facing pressing concerns as customers are cutting down on non-essential purchases. Also, shift in consumer demand and preferences toward smart technologies and digital gaming is continuously hurting Mattel.
Notably, the company has extensive international presence and is therefore highly vulnerable to fluctuations in exchange rates. Foreign exchange translation has been hurting revenues and profits over the past few quarters. Strengthening of the dollar against other currencies might continue to hurt revenues in 2017.
Meanwhile, lack of schemes for brand awareness and innovation has been affecting revenues and Point of Sales (POS). Though overall POS has been mostly positive owing to the company’s efforts to lower retail inventories, the improvement is not broad based. We need to wait for more consistent progress across all of the company’s brands.
Since 2016, Mattel no longer holds the rights to develop dolls based on The Walt Disney Company characters from the animated movies Frozen and Disney Princess. Though Mattel is one of Disney’s major entertainment partners for a number of Boys and infant pre-school properties, the loss of rights has been adversely impacting its revenues. The partnership with Disney has been a solid growth driver.
Also, the recent Toys ‘R’ Us Chapter 11 bankruptcy filing is likely to affect Mattel as well as other toymakers like Hasbro, Inc. HAS and JAKKS Pacific, Inc. JAKK as these companies generate almost 10% of their overall sales from Toys ‘R’ Us.
Some Respite
Mattel possesses a strong product line-up, which includes core brands, licensed brands and lucrative product associations. Furthermore, the company has been making efforts on the digital front and focusing on better execution of marketing and promotional initiatives to regain sales momentum. Product innovation and strategic partnerships with other companies position Mattel well in terms of its brand presence. Also, the company is vying to gain traction in international markets.
Bottom Line
Mattel’s shares have massively underperformed its industry year to date. The company’s shares have lost 43.5% as compared to the industry’s gain of 48.4%.
Moreover, Mattel’s earnings estimate revisions for the current quarter and year have declined 12.1% and 21.5%, respectively, in the last 60 days.
Despite strong brand presence and sales-boosting initiatives, company-specific and industry concerns coupled with decline in the company’s stock price as well as downward estimate revisions signal at more trouble down the road for this Zacks Rank #5 (Strong Sell) company.
A better-ranked stock in the same sector is Nintendo Co., Ltd. NTDOY, sporting a Zacks Rank #1 (Strong Buy). The company’s current-year earnings are expected to increase 211.70%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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