Shares of Mattel, Inc. MAT have underperformed the industry in the past six months. The stock has declined 16.6% against the industry’s rise of 11.9%. However, stocks such as Activision Blizzard, Inc. ATVI, Glu Mobile Inc. GLUU and Electronic Arts Inc. EA, which belong to the same industry, have witnessed a sharp gain of 14.5%, 42.4% and 24%, respectively, in the same time frame. Yet, the company seems to be banking on its strategic investments in emerging markets and key power brands — Barbie, Hot Wheels and Fisher-Price — to drive growth. Let’s delve deeper and find out whether Mattel can match its peers performance in the near term.
Hidden Catalysts
Since the U.S. toy market is somewhat saturated, toy companies like Mattel are exploring growth opportunities abroad. This is because international markets offer greater potential based on the pace of economic growth that they currently enjoy. In fact, Mattel has been seriously focusing on expanding its presence in Europe, Latin American and Asian countries. Meanwhile, emerging markets continue to demonstrate strong growth and long-term potential, mainly Asia-Pacific and Latin America. Particularly, to succeed in China, Mattel has adopted a solutions-based and digital-first method to localize products, which has aided the company to scale swiftly in the past five years.
Additionally, the company remains focused on achieving cumulative cost savings through its current cost savings program to boost margins. Also, it is simplifying organization structure, and optimizing processes and supply chain to generate savings across operations.
This apart, Mattel continues to make progress in its $650 million Structural Simplification cost savings initiatives and prioritized investments. Subsequently, the company expects to achieve 40% of the $650 million in 2018, with savings heavily weighted toward the second half of the year. In the first quarter, it has already taken actions toward achieving this goal. These actions are expected to result in full-year run-rate savings of approximately $165 million, which includes $85 million in SG&A, $50 million in cost of goods sold, and $30 million in advertising.
Given a strong product line-up that includes core brands, licensed brands and lucrative product associations, Mattel remains well positioned for growth. In fact, the company’s premier brand like Hot Wheels has been the category leader in multiple product segments for several years owing to its popularity among young boys and girls. Mattel has also forayed into other consumer product categories such as apparel, fashion and accessories to build the brands.
Hurdles to Cross
Tighter retail inventory management significantly affected Mattel’s first-quarter 2018 sales and may continue to hamper revenues, going forward. Moreover, due to a simplified cost savings initiative that included write-downs of excess owned inventory and impairment of assets, the company’s adjusted gross margin in 2017 contracted 850 basis points (bps). This downtrend is likely to persist in the short term. Further, costs related to marketing and promotional initiatives, for cleaning up inventories, coupled with the development of digital platforms are likely to keep margins under pressure, moving ahead.
Moreover, Mattel’s net revenues in the first quarter of 2018 declined 7% year over year (on a constant-currency basis) due to Toys "R" Us liquidation. It also led to sales decline across every brand under Mattel. We believe that the effect of this liquidation will linger further as Toys “R” Us was the last major chain fully dedicated to selling toys, and the overall industry is expected to grow at a much slower pace for quite some time.
Mattel has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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