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Mattel (MAT) Up 17.2% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Mattel (MAT - Free Report) . Shares have added about 17.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Mattel due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Mattel's Q4 Earnings & Sales Drive Past Estimates

Mattel has reported better-than-expected fourth-quarter 2018 results, wherein the bottom line surpassed the Zacks Consensus Estimate for two straight quarters. Also, the top line surpassed the consensus estimate after lagging in two consecutive quarters.

However, the big take away from the quarter under review was an increase in Barbie sales and higher operating margin.

Adjusted earnings were 4 cents per share, outpacing the Zacks Consensus Estimate of loss of 11 cents. In the prior-year quarter, Mattel incurred adjusted loss of 72 cents per share. Sharp increase in earnings was primarily driven by the company’s cost-saving initiatives.

Sales Discussion

Net sales of $1,524.3 million surpassed the consensus estimate of $1,418 million but declined 5.4% year over year. This underperformance can be attributed to Toys ‘R’ Us liquidation and slowdown in China operation. On a constant-currency basis, sales decreased 3% from the prior-year quarter. Notably, Toys ‘R’ Us liquidation and slowdown in China operation negatively impacted sales by 8% and 2%, respectively.

Worldwide gross sales were down 11% year over year as reported and 9% at constant currency. In North America (including the United States, Canada and American Girl), the metric declined 10%, both as reported and in constant currency, due to a negative impact of Toys "R" Us liquidation. On a reported basis, net sales from the same region increased 6% year over year.

Meanwhile, in the International region, gross sales declined 7% as reported and 2% in constant currency due to a 4% impact of the slowdown in China business and a 3% impact of the Toys "R" Us liquidation.

Brand-Wise Worldwide Sales

Mattel, through its subsidiaries, sells a broad range of toy products. These items are grouped under four major categories — Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands, and Construction and Arts & Crafts Brands.

Power Brands

As reported, worldwide gross sales at Mattel Power Brands decreased 6% to $1.2 billion year over year. The metric declined 3% on a constant-currency basis. On the flip side, the Barbie brand witnessed 12% growth as reported and 15% in constant currency, owing to positive POS momentum. Also, gross sales at the Hot Wheels brand increased 9% on a reported basis and 12% in constant currency, courtesy of Hot Wheels' 50th anniversary. At the Fisher-Price and Thomas & Friends brands, gross sales were down 17% as reported and 15% in constant currency. The same at American Girl decreased 27% as reported and in constant currency.

Toy Box

In the fourth quarter, worldwide gross sales at Mattel Toy Box brands (Owned Brands and Partner Brands) were $519 million, down 21% as reported and 19% on constant currency. The same at Owned Brands decreased 17% as reported and 15% in constant currency due to lower sales at MEGA products. Meanwhile, at Partner Brands, the metric declined 25% as reported and 23% at constant currency due to lower sales of CARS products, partially offset by initial sales of Jurassic World products.

Operating Results

Adjusted gross margin expanded to 46.6% from 32% in the year-ago quarter, buoyed by Structural Simplification savings and lower inventory expenses, partially offset by a negative 350 basis point impact of labor and raw material cost inflation.

Adjusted Other Selling and Administrative Expenses increased by $3 million year over year, primarily due to incentive compensation, partially offset by Structural Simplification cost savings.

Balance Sheet

As of Dec 31, 2018, the company’s cash and equivalents were $594.5 million compared with $1,079.2 million as of Dec 31, 2017. Total inventories as of the end of 2018 decreased 9.6% year over year.

The company’s long-term debt summed $2.85 billion as of Dec 31, 2018, lower than $2.87 billion as of Dec 31, 2017. Shareholder’s equity was $669.5 million.

Glimpse of 2018 Results

For 2018, net sales were 8% as reported and 7% in constant currency. Gross Sales were down 8% as reported and 7% in constant currency, reflecting a negative 6% impact of the Toys "R" Us liquidation and a 2% impact of slowdown in the China business. Adjusted operating loss was $115 million, marking an improvement of $92 million from the prior year. Adjusted loss per share was $1.14 in 2018, an improvement of $0.07 from the prior year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -49.74% due to these changes.

VGM Scores

At this time, Mattel has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Mattel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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