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World’s largest toy manufacturer, Mattel Inc. (MAT - Analyst Report) is set to report third quarter 2013 results before the opening bell on Oct 16. In the last quarter, it delivered a negative earnings surprise of 34.4%. Let’s see how things are shaping up for this announcement.

Factors to Consider

Mattel’s core Fisher-Price products were considerably down in the first two quarters of 2013. Although Mattel will be launching several products in the rest of 2013, they are expected to contribute only marginally to 2013 sales thus having no material impact on the third quarter. Further, persistent sluggishness in its powerhouse brand, Barbie, also remains an overhang.

Of late, toy manufacturers have been highly affected by age compression which is leading to a drift toward digital solutions from traditional games, thus hurting toy sales. Limited consumer spending also continues to affect the retail environment for the toy industry.

Mattel also struggled on the revenue front in the last quarter. While net sales nudged up 0.9% year over year, it fell shy of the Zacks Consensus Estimate by 3.3%.

Mattel witnessed downward movement of estimates in the past 7, 30 and 60 days for the upcoming quarter as well as full year 2013. The Zacks Consensus Estimate for the upcoming quarter declined 0.9% to $1.10 over the last 7 days.

Earnings Whispers?

Our proven model does not conclusively show that Mattel is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Expected Surprise Prediction or ESP for Mattel is -3.64% since the Most Accurate Estimate stands at $1.06 per share, while the Zacks Consensus Estimate is higher at $1.10.

Zacks Rank #4 (Sell) : Mattel’s Zacks Rank #4 when combined with a negative ESP makes positive surprise prediction difficult. We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other stocks in the broader consumer discretionary sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Take-Two Interactive Software Inc. (TTWO - Snapshot Report), with Earnings ESP of + 15.08% and Zacks Rank #2 (Buy).

Hyatt Hotels Corp. (H - Snapshot Report), with Earnings ESP of + 13.64% and Zacks Rank #3 (Hold).

Wynn Resorts Ltd (WYNN - Analyst Report), with Earnings ESP of + 8.81% and Zacks Rank #2 (Buy).

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