Mattel (MAT) Stock Declines on Q3 Earnings & Sales Miss

Shares of Mattel Inc. MAT declined over 19% in afterhours trading on Oct 26, after the company reported weak results in the third quarter of 2017.

Earnings & Revenue Discussion

Mattel’s adjusted earnings of 9 cents per share fell short of the Zacks Consensus Estimate of 56 cents by 83.9%. The reported figure decreased 87.1% from the prior-year quarter earnings of 70 cents, given lower revenues.     

Net sales of $1.56 billion declined 13% year over year as reported and 14% in constant currency. This downturn was due to negative impact of the Toys “R” Us bankruptcy filing, tighter retailer inventory management and challenges with certain underperforming brands. In fact, Mattel also reported lower-than-expected sales in nearly every toy brand and category in the quarter.

Resultantly, revenues came below the consensus mark of $1.84 billion by 15%.

Quarter Highlights

Worldwide gross sales were down 13% year over year as reported and 15% in constant currency.

Gross sales in North America (including the United States, Canada and American Girl) declined 22% as reported and in constant currency mainly due to lower sales as a result of Toys "R" Us filing for bankruptcy and tighter retailer inventory management.  Meanwhile, in the International region, gross sales were flat as reported (down 2% on a constant currency basis).

Also, gross margin decreased 700 bps to 41.5% from 48.5% recorded in the year-ago quarter. This was due to unfavorable product mix, higher freight and logistics expenses, an adverse impact from Toys "R" Us bankruptcy filing and lower licensing income.

Adjusted operating income for the quarter was $159.7 million compared with the prior-year quarter figure of $324.1 million.

Worldwide Revenues by Brand

Mattel, through its subsidiaries, sells a broad variety of toy products that are grouped into four major brand categories - Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands, and Construction and Arts & Crafts Brands.

As reported, worldwide gross sales at Mattel Girls & Boys Brands fell 9% to $967 million year over year (down 10% on a constant-currency basis). The downside was led by a 40% fall in the Other Girls brands as reported (down 42% in constant currency), given declines in Monster High and DC Super Hero Girls. The Barbie brand decreased 6% as reported and 7% in constant currency, driven by a shift in DVD entertainment strategy. Notably, the Wheels category too dropped 4% in the quarter as reported (down 6% in constant currency) due to declines in Tyco RC vehicles.

On the contrary, the Entertainment business witnessed a 1% rise as reported (down 1% in constant currency) backed by increases in CARS sales, offset by declines in Minecraft and WWE Wrestling.

Gross sales at Fisher-Price Brands, which includes the Fisher-Price Core, Fisher-Price Friends and Power Wheels brands slipped 15% year over year to $561.6 million as reported (down 16% in constant currency). Declines in Thomas & Friends and infant products hampered the results.

Gross sales at American Girl Brands were $88 million, down 30% from the year-ago quarter as reported and on a constant-currency basis primarily due to lower licensing income and initial sales in the prior year via external distribution channels.

Gross sales at Construction and Arts & Crafts Brands, which includes the Mega Bloks and RoseArt brands, were $84.6 million, down 29% from second-quarter 2016 as reported (down 30% in constant currency). The decline was primarily due to decrease in Mega Bloks licensed and Preschool products.

Bottom Line

The weaker-than-expected results are the latest concern for this toy maker, who named its third chief executive in as many years earlier this year in an endeavor to turn the company around.

Nevertheless, following the disappointing results, Mattel now plans to cut $650 million in costs over the next two years. Also, the company has suspended its quarterly dividend of 15 cents beginning in the fourth quarter of 2017 to augment financial flexibility, fortify balance sheet and facilitate strategic investments.

Performance of Other Toymakers

Among other toymakers, Hasbro Inc. HAS posted solid third-quarter results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. However, JAKKS Pacific, Inc. JAKK reported lower-than-expected results in the same quarter.

Zacks Rank & Stock to Consider

Mattel carries a Zacks Rank #5 (Strong Sell).

A better-ranked stock in the same sector is Nintendo Co., Ltd. NTDOY sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nintendo’s fiscal 2018 earnings moved up 2.7% over the last 60 days. Meanwhile, EPS is expected to skyrocket 211.7% for the same period.

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