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Here's Why You Should Get Rid of Mattel (MAT) Stock Now

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Mattel, Inc. MAT, the largest toy retailer in the United States, has been losing steam, of late. Year to date, shares of the company have lost a massive 43.3% as against the industry’s gain of 42.7%.

It should also be noted that over the last 60 days, the Zacks Consensus Estimate for the bottom line has moved down from earnings to loss for the current year, reflecting analysts’ bearish sentiments.

Further, a Zacks Rank #5 (Strong Sell) along with the following reasons underscore the fact why you should steer clear of Mattel.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dismal Guidance for Sales and Margins

The toy industry has been plagued with lower sales for the past few quarters. This is because growing demand for a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices, from companies like Electronic Arts, Inc. EA is posing a threat to the U.S. toy makers.

Meanwhile, in a recent regulatory filing, Mattel stated that it expects 2017 sales to decline in mid-to-high single digits from 2016. The company is particularly apprehensive about its key retail partners which are moving toward tighter inventory management. Moreover, Toy Box-related challenges and certain underperforming brands might dent the company’s top-line performance in the near future.

Subsequently, the current-year consensus estimate for sales is pegged at $5.1 billion, reflecting a 6.5% drop from the year-ago level.

Also, despite various cost-cutting initiatives, Mattel estimates a marginal upsurge in 2017 expenses in comparison to 2016, on a gross-dollar basis. The company predicts a year-over-year escalation in other operating expenses in fourth-quarter 2017.

As a result, Mattel’s operating margin, excluding severance expenses, is expected to be significantly lower in the fourth quarter from the prior-year level. In addition, its gross margin and operating income could be further impacted by fourth-quarter charges or expenses which include restructuring and other non-cash write-offs.

Toys ‘R’ Us Bankruptcy to Hurt Top and Bottom Lines

The Toys ‘R’ Us’ Chapter 11 bankruptcy filing in September has been an added misery to the already suffering toy industry. The bankruptcy aggravated matters for Mattel as well as its peers Hasbro, Inc. (HAS - Free Report) and JAKKS Pacific, Inc. JAKK.

Mattel has been particularly affected by the Toys ‘R’ Us’ bankruptcy as it resulted in a year-over-year decline in third-quarter 2017 revenues and profits. In fact, since the company’s gross margins included the associated cost of goods sold, the net sales reversal in Toys ‘R’ Us accounted for approximately one-fifth of the year-over-year decline in gross margin. The impact of the bankruptcy is expected to linger in the upcoming quarters as well.

Unfavorable Product Mix and Higher Expenses to Dent Profitability

Mattel reported a year-over-year contraction of 620-basis points (bps) in gross margins during the first nine months of 2017. This decline, owing to unfavorable product mix, higher freight and logistics expenses, and lower fixed cost absorption, is anticipated to reflect in the fourth-quarter results as well. A persistent decline in the top line is likely to result in gross margin deterioration due to higher inventory write-downs and discounts offered to clear inventory. Subsequently, the consensus estimate for current-year earnings is pegged at a loss of 16 cents per share, reflecting a year-over-year plunge of 115.3%.

Suspension of Dividend a Concern for Shareholders

Mattel has suspended its dividend payments and adopted cost-cutting initiatives to counter weak sales. This has not yet aided the top line but might result in loss of shareholders’ confidence on the stock. In fact, the company has delivered a return on equity (ROE) of nearly 1.5% over the trailing 12 months compared with the industry’s gain of 13.3%. This shows that Mattel is unable to reinvest efficiently when compared with its peers.

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