Shares of leading toy-maker, Mattel, Inc. (MAT - Free Report) , have declined 22.5% over the last one year, while the Zacks categorized Toys/Games/Hobby Products industry gained 31.9% in the same time frame.
Moreover, over the past 60 days, earnings estimates for full-year 2017 and 2018 have gone down by 17.5% and 12.6%, respectively. This testifies the flinching confidence that analysts have in the company. In fact, the company’s bearish trend is the reason behind its Zacks Rank #5 (Strong Sell) and that it might continue to disappoint in the near-term.
Let’s take an in-depth look at the factors that have hampered the stock’s momentum and are behind the slump:
Age compression is hitting the toymakers revenue severely, and Mattel is no exception. For instance, previously, the demand for Barbie was more common among kids aged between three and nine years, which have narrowed down to three and six years. This in turn is tapering the demand for traditional toys.
The iconic brands of the company also have to battle a broad array of alternative modes of entertainment, including video games, tablets and other electronic devices. Hence, toy makers are facing stiff competition from the manufacturers of such products like Electronic Arts, Inc. (EA - Free Report) and Activision Blizzard, Inc. (ATVI - Free Report) . Both the companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Additionally, consumer spending uncertainty continues in the U.S. as customers are restraining their non-essential purchases. Meanwhile, weak performance in Western European and Latin American markets like Brazil due to a challenging macroeconomic environment remains a concern. Further, in Europe, the economic/political conditions are expected to remain challenging post Brexit. Meanwhile, although the company’s performance in China has been solid, a slowdown in the economy may hurt revenues, going forward.
Mattel also has considerable international presence and is therefore highly vulnerable to fluctuations in exchange rates. In fact, foreign exchange translation has been hurting revenues and profits of the company over the past few quarters, and is expected to continue doing so.
Lack of innovative schemes for brand awareness and innovation has been affecting the company’s revenues and Point of Sales (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. We need to wait for more consistent progress in all its brands.
In fact, Mattel fell short of its 2016 gross margin expectations of nearly 50%. Further, costs related to marketing and promotional initiatives and for cleaning up inventories coupled with the development of digital platforms are likely to keep margins under pressure. Thus, the company pushed out its longer-term target of achieving the low end of the 15-20% operating margin range from 2018 until 2019.
From 2016, Mattel no longer holds the profitable rights to develop dolls based on The Walt Disney Company characters from the animated movie Frozen and Disney Princess. Hasbro, Inc. (HAS - Free Report) , another toy maker, gained the manufacturing rights for these dolls, beginning 2016, worldwide, except Japan. Though Mattel remains one of Disney’s major entertainment partners for a number of Boys and infant pre-school properties, the loss of rights has been adversely impacting its revenues. The partnership with Disney was a solid growth driver.
Given the strong product line-up that includes core brands, licensed brands and lucrative product associations, Mattel remains well positioned for growth in the long term. Owing to its popularity among young boys and girls, the company’s premier brand, like Hot Wheels, has been the category leader in the multiple product segments for several years. Besides all these, Mattel has also forayed into other consumer product categories such as apparel, fashion and accessories to build the brands.
Meanwhile, the company’s focus on improving point of sale through introduction of more products, brand innovation and strategic initiatives like entering into new categories and strengthening the Girls portfolio bode well. Going forward, Mattel’s renewed contracts for toy franchisees of Cars 3 and Toy Story 4 are likely to boost its top line. Efforts to achieve cumulative cost savings and enhanced margins remain added positives for the company.
Though the company is undertaking various initiatives, it will take some time for all the brands to show consistent improvement. In fact, both company-specific and industry-wide concerns coupled with decline in the company’s stock price as well as downward estimate revisions suggests that there may be more trouble down the road.
Unless a huge turnaround marks its entry, the slump is likely to continue, making it prudent to get rid of Mattel shares at the moment.
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