Mattell Inc.: Zacks’ Bear of the Day Play

Cyclical companies look to one specific month or at times one quarter to make the majority of their sales for the entire year.  While this can be nerve wracking for management, these time periods tend to see huge volumes, and can be extremely profitable for the company.  But when merchants slow their buying trends, the company’s input costs increase, and customers reduce their buying activity, margins and revenues get crushed.  This is what happened to Mattel Inc.(MATFree Report) , our Zacks Bear of the Day.

This Zacks Ranked #5 (Strong Sell) company designs, manufactures, and markets a broad variety of family products on a worldwide basis through both sales to retailers and direct to consumers. Mattel’s business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines, to design and develop innovative new products and product lines, and successfully market those products and product lines.

Recent Earnings Results

On January 25th the company posted Q4 16 earnings results where missed both the Zacks consensus earnings and revenue expectations.  The company saw year over year declines in several key areas; worldwide net sales -4%, worldwide gross sales -3%, reported operating income -4%, reported EPS -14.8%, net cash flows from operating activities -19.7%, and gross margins fell by 240 basis points.  On a regional view, the company saw year over year declines; net sales North America -2%, net sales International -8%, and gross sales North America -1%, gross sales International -6%.

Management’s Take

According to Christopher Sinclair, Chairman and CEO, “Our results were negatively impacted by a number of industry-wide challenges, including a significant U.S. toy category slowdown in the holiday period, and increased forex headwinds. And while our sales at retail remained strong, the slowdown triggered elevated retail promotional activity and decreased shipping, all of which had a significant impact on our gross margin.”

Price and Earnings Consensus Graph

As you can see in the price and earnings estimate graph below, 2017 estimates and current stock price have sharply declined.

Mattel, Inc. Price and Consensus

Mattel, Inc. Price and Consensus | Mattel, Inc. Quote

Declining Earnings Estimates

Due to the poor earnings report, earnings estimates for Q1 17, Q2 17, FY 17 and FY 18 have all seen declines over the past 7 days; Q1 17 fell from -$0.07 to -$0.13, Q2 17 slipped from $0.04 to $0.02, FY 17 dropped from $1.71 to $1.43, and FY 18 moved lower from $1.90 to $1.68.

Bottom Line

Mattel, has missed expectations in three out of the last four holiday quarters.  While management has had recent success in stabilizing their core brands, this holiday miss makes the 2017 story a bit murky.  Further, due to the deceleration in retail sell-through in December, retailers limited their orders which caused inventories to increase for Mattel.  This extra inventory will weigh on 2017 sales.

If you are inclined to invest in the Toys/Games/Hobbies segment, you would be best served to wait for a better entry point as every member of the segment has a Zacks Rank #3 (Hold) or lower.

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