Mattel Inc. (MAT) reported weak fourth-quarter and full year 2014 results. Quarterly earnings and revenues missed the Zacks Consensus Estimate for the fifth time in a row. As announced during the preliminary results reported on Jan 26, adjusted earnings of 52 cents per share missed the Zacks Consensus Estimate of 96 cents per share by approximately 46% and also declined 51.4% year over year. The significant downside reflects weak sales and lower margins.
Consistent with the preliminary figures, revenues declined 6% year over year to $1.99 billion possibly owing to a significant decline in sales of Barbie and Fisher-Price, its two flagship brands. Also, it missed the consensus mark of $2.16 billion by 8.3%.
In fact, sluggish performance of the Fisher-Price and Barbie Brands has been a matter of concern for Mattel since the beginning of 2013. Moreover, the rate of year-over-year revenue decline has increased every quarter owing to weak demand for traditional toys. Increasing inclination of kids toward electronically driven devices has adversely impacted the demand for traditional products.
Notably, Bryan G. Stockton, the chairman and chief executive officer of this toy maker recently resigned from the company given the consistently sluggish results. The company stated that it was disappointed with its results and would make some necessary changes to enhance brand relevance and improve execution.
Quarter Highlights
Gross sales from North America (including the U.S., Canada and American Girl) were down 2% while sales from International region were down 5%.
Mattel acquired Mega Brands Inc. in Apr 2014. As a result, the company now reports under four segments, namely Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands and the newly added segment Construction and Arts & Crafts Brands. Notably, Mega Brands Inc. was a leading global brand in the construction building sets and arts & crafts category.
Worldwide gross sales at Mattel Girls & Boys Brands declined 9% year over year to $1.23 billion. Worldwide gross sales of the Barbie brand were down 12% while the Other Girls brand was down 3%. Worldwide gross sales of the Entertainment business plunged 21% year over year. These negatives were partially offset by 2% increase in gross sales of the Wheels category.
Sales at Fisher-Price, which includes Fisher-Price Core, Fisher-Price Friends and Power Wheels brands, declined 11% year over year to $578.9 million due to weak demand.
Gross sales at American Girl also declined 4% year over year to $318.3 million owing to sluggish demand.
Gross sales from the Construction and Arts & Crafts segment, which includes the Mega Bloks and RoseArt brands, were $130.0 million, up 5.3% on a quarterly basis.
Gross margin declined 410 basis points to 50.4% in the fourth quarter due to higher expenses related to the acquisition of MEGA Brands while selling general and administrative expenses increased 390 basis points as a percentage of sales. Owing to higher expenses, operating income was only $237.0 million, down 51% year over year.
Full-Year Results
Earnings per share in 2014 were $1.61, down 37.6% year over year. The figure also missed the Zacks Consensus Estimate of $1.90 by 15%. Worldwide net sales were $6.02 billion, down 7% year over year.
Our Take
Mattel has to battle a broad array of alternative modes of entertainment including video games, MP3 players, tablets, smartphones and other electronic devices. This toy maker thus faces stiff competition from manufacturers of such products. Meanwhile, despite moderate improvement in economic growth, consumers are increasing their spending only modestly as an increase in jobs this year is yet to translate into significantly higher wages, thereby hurting revenues.
Also, the loss of rights to make dolls based on The Walt Disney Company (DIS) characters to Hasbro Inc. (HAS), as announced in Sep 2014, has compounded woes. The company is likely to lose a substantial chunk of revenues, especially at a time when the toy maker is battling intense competition, as the result of increasing popularity of electronic and mobile games.
The company presently has a Zacks Rank #4 (Sell). Electronic Arts Inc. (EA) is a better-ranked stock in the same industry, sporting a Zacks Rank #1 (Strong Buy).
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