Mattel, Inc. (MAT - Free Report) is poised to benefit from product innovation, marketing and promotional initiatives, digital efforts and robust Hot Wheels sales. However, disruptions in supply chains due to the coronavirus outbreak along with high promotional expenses pose concerns.
Let’s delve deeper.
Factors Likely to Drive Growth
Mattel is likely to benefit from its a strong product line-up that includes core brands, licensed brands and lucrative product associations. Moreover, its foray into other consumer product categories such as apparel, fashion and accessories bodes well.
Notably, the company has been undertaking efforts and focusing on better execution of marketing and promotional initiatives to revive its flagship brands, Barbie and Fisher-Price. In fact, the company has formed a brand development framework to unlock the scale and profitability of its brands and modernize them for the digital world. Markedly, the company is making significant progress to transform Mattel into an IP-driven high-performing toy company.
Nonetheless, Mattel is also focusing on cost-saving efforts to boost its bottom line. Through its current cost-saving program, the company is focused on expanding margins. Notably, it is simplifying its organization structure, optimizing processes and supply chain to generate savings across operations. For 2020, Mattel targets gross margin growth of 150-200 basis points, primarily backed by structural simplification program and incremental savings from its capital light program.
Robust Hot Wheels sales have impressed investors. In first-quarter 2020, Hot Wheels sales increased 5% on a reported basis and 8% at constant currency. In North America and International segments, Hot Wheels sales rose 11% and 1% year over year, respectively, on a reported basis.
Due to the coronavirus pandemic, the company expects the second quarter of 2020 to be more challenging than the first quarter owing to supply chain disruptions.
The company said that reaching its products to customers has been quite a challenge. It faced retail disruptions in March and April and the same is likely to continue in the long run. Results will also be impacted by the postponed launch of Universal's Minions, which was expected to be a major growth driver in 2020.
Apart from this, increased competition from a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices, is a pressing concern.
Mattel has been focusing on advertising, marketing and promotional activities to improve POS momentum and drive sales. Such activities are resulting in high expenses. In first-quarter 2020, advertising and promotion expenses increased 10.4% from the year-ago quarter. So far this year, shares of Mattel have declined 29.4% against the industry’s 14.1%, growth.
Zacks Rank & Key Picks
Mattel currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Consumer Discretionary sector include K12 Inc. (LRN - Free Report) , Culp, Inc. (CULP - Free Report) and Activision Blizzard, Inc. (ATVI - Free Report) , each sporting a Zacks Rank #1.
K12 has a three-five year earnings per share growth rate of 15%.
Earnings in 2021 for Culp are expected to surge 75%.
Activision Blizzard has a trailing four-quarter positive earnings surprise of 31.3%, on average. The company’s earnings beat the Zacks Consensus Estimate in the last four quarters.
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