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On May 23, 2014, we issued an updated research report on Mattel, Inc. (MAT - Analyst Report).

On Apr 17, this leading toy maker reported dismal first quarter 2014 results with earnings and revenue missing the Zacks Consensus Estimate. The company posted adjusted loss of 3 cents per share, which compared unfavorably with the prior-year quarter earnings of 11 cents due to weak sales and lower operating income.

During the quarter, net sales declined 5.0% year over year to $946.2 million, primarily reflecting poor performance in the domestic as well as international markets. Sales of Barbie and Fisher-Price brands once again dropped in the quarter. Meanwhile, the company had carryover inventory in some international markets. Though it tried to clear the stock, its attempts were futile due to the weak consumer spending environment.

Mattel’s weak results reflect that consumer spending uncertainty still lingers amid sluggish economic growth in the U.S. as customers curb their non-essential purchases. Sluggish performance of Fisher-Price and Barbie has been a matter of concern for long. Both these flagship brands have been posting soft sales since 2013.

Over the last 30 days, estimates for this Zacks Rank #4 (Sell) company largely moved downwards for 2014 and 2015 owing to the weak performance.

However, we believe that the company’s aggressive initiatives to improve point of sales (POS) like entering new categories and strengthening the Girls portfolio would boost revenues. Also, the company is working on the digital front and plans to bring in enhanced digital capabilities to its American Girl brand to market it across multiple channels by mid-2014.

Moreover, the company is focusing on better execution of marketing and promotional initiatives. It is working on bringing better science and analytics to its advertising and trade spending programs to generate higher returns from its spending. The company plans to invest $1.0 billion effectively over advertising in 2014 to boost POS. Mattel is optimistic about these initiatives and expects them to improve revenues in the second half of the year and beyond.

Meanwhile, the acquisition of Canadian toymaker Mega Brands in Apr 2014 should lead to improved revenues in the future. Mega Brands is a well-recognized brand in the construction category and owns Mega Bloks. It would expand Mattel’s presence in two of the fastest-growing toy categories, construction building sets and arts & crafts.

Also, the company is investing in international markets that promise huge long-term growth and have the potential to garner several hundred million dollars in a few years. Moreover, the company’s disciplined cost control should lead to better margins.

Electronic Arts Inc. (EA - Analyst Report) is a better-ranked stock in the same sector with a Zacks Rank #1 (Strong Buy).  Investors can also consider Columbia Sportswear Co. (COLM - Snapshot Report) and The Walt Disney Co. (DIS - Analyst Report) from the consumer discretionary sector. Both these stocks carry a Zacks Rank #2.

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