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Mattel (MAT) Poised for Growth Amid Risks & Competition

JAKK HAS MAT TTWO

Trades from $3

On Nov 22, we issued an updated research report on Mattel, Inc. (MAT - Free Report) , the world’s largest manufacturer of toys.

Mattel posted strong third-quarter 2016 results on Oct 19, wherein earnings came in line with the Zacks Consensus Estimate and revenues surpassed.

Prospects

Mattel’s increased focus on improving its point of sale through the introduction of more products, brand innovation and strategic initiatives like entering new categories and strengthening the Girls portfolio bode well.

Going forward, we believe the company’s renewed contracts for toy franchisees of Cars 3 and Toy Story 4 will significantly boost its top line. Its core brands like Hot Wheels, Thomas and MEGA Brands continue to do well.

Also, efforts undertaken on the digital front and its focus on better execution of marketing and promotional initiatives to bring back its flagship brands, Barbie and Fisher-Price, to their former glory have started yielding results. The company witnessed a strong upside in Barbie sales in the second and third quarters of 2016, and Fisher-Price has been doing quite well of late.

Moreover, the company stated that it has almost completely made up for the year-to-date Disney Princess revenue gap by building core brand momentum and new partnerships. Also, Mattel’s focus on achieving cumulative cost savings should enhance margins through its current cost savings program.

Despite some short-term headwinds, the company is significantly investing in foreign markets as they promise considerable long-term growth and have the potential to be significant revenue drivers.

Concerns

However, lack of innovative schemes for brand awareness and brand innovation has been hurting the company’s revenues and POS momentum. Though overall POS has been mostly positive owing to the company’s efforts to lower retail inventories, the improvement is not broad based. Sluggish performance by certain segments and brands along with a challenging macroeconomic environment has also been hurting the company’s sales.

Unfavorable foreign exchange translation remains a major headwind. In fact, Mattel expects to fall short of its 2016 gross margin expectation of nearly 50% because of forex headwinds and an unfavorable mix impact.

Moreover, apart from battling a broad array of alternative modes of entertainment, Mattel continues to face stiff competition from toy companies like JAKKS Pacific, Inc. (JAKK - Free Report) and Hasbro Inc. (HAS - Free Report) .

Zacks Rank & Stock to Consider

Mattel carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader Consumer Discretionary sector is Take-Two Interactive Software Inc. (TTWO - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Take-Two Interactive Software posted positive earnings surprise in each of the last four quarters, with an average beat of 118.21%. For fiscal 2017, EPS is expected to improve 10.2%.

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