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3 Reasons Why Investors May Want to Steer Clear of Mattel

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Mattel, Inc. (MAT - Free Report) has been losing sheen of late. Not exempting the current fate of toymakers in the United States, the company is plagued with declining consumer demand and sales crunch.

Notably, Mattel had suspended its quarterly dividend of 15 cents per share starting in the fourth quarter of 2017 to augment financial flexibility, fortify balance sheet and facilitate strategic investments. The dividend suspension is not going down well with investors and is in turn hurting the company’s share-price performance.

A look at Mattel’s price trend reveals that the stock has had an unimpressive run on the bourses in the past year. Shares of the company have lost 17.3% against the industry’s rally of 21.3% in the same time frame. This reflects investors’ pessimism on the stock, given uncertain sales environment. Moreover, over the past two months, earnings estimates for the current quarter and year have been revised downward, reflecting analysts’ doubt surrounding the company’s future earnings potential.


Toys ‘R’ Us Woes Likely to Linger

The U.S. toy industry was dealt a heavy blow when the country’s largest independent toy seller, Toys "R" Us filed for bankruptcy last September. Adding a nail to the coffin, Toys “R” US said that it is liquidating its U.S. operations, leaving toymakers like Hasbro (HAS - Free Report) , Mattel and JAKK Pacific (JAKK - Free Report) in a mess as they used to derive a considerable portion of their revenues from sales to Toys "R" Us. Although retailers like Amazon (AMZN - Free Report) had come to rescue these toymakers, they currently don’t have shelf spaces as big as Toys “R” Us, which is a concern.

In fact, owing to the liquidation, Mattel’s net revenues in the first quarter of 2018 declined 7% year over year on a constant-currency basis. It also resulted in sales slump across Mattel’s every brand. We believe that effect of this liquidation will linger further as Toys “R” Us was the last major chain fully dedicated to selling toys and the overall industry is expected to grow at a much slower pace for quite some time.

Dismal Sales Environment to Continue

Sluggish performance of a few key brands has been hurting the company’s performance. In this context, at the Mattel Girls & Boys Brands, performance of the Other Girls brand has been a matter of concern for quite some time, given declines in Monster High and Ever After High sales.

Although the company heavily relies on a growing pipeline of tech-enabled products that capitalize on new play patterns and allow it to extend beyond traditional toys for younger age groups, positive outcome from such strategies are expected to take time.

Also, lack of innovative schemes for brand awareness and 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. We need to wait for more consistent progress of all its brands.

Subsequently, per the Zacks Consensus Estimate, revenues are likely to fall 3% in 2018 compared with the prior year.

Margins Likely to Continue Hurting Earnings

A rise in operating expenses is expected to hurt Mattel’s bottom line. Meanwhile, tighter retail inventory management significantly affected Mattel’s first-quarter 2018 sales and may continue to hamper revenues, going forward. Moreover, due to a simplified cost-savings initiative that included write-downs of excess owned inventory and impairment of assets, the company’s adjusted gross margin in 2017 fell 850 basis points and is likely to be further impacted in the short term. 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, going forward. 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.

Currently, Mattel carries a Zacks Rank #4 (Sell).

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

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