Why Is Mattel (MAT) Down 42.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Mattel (NASDAQ:MAT). Shares have lost about 42.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mattel due for a breakout? 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 Earnings Surpass Estimates in Q4, Revenue Miss

Mattel reported mixed fourth-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. The bottom line beat the consensus estimate for the sixth straight quarter.

The company reported adjusted earnings of 11 cents, which surpassed the Zacks Consensus Estimate of break-even earnings. In the prior-year quarter, the company had reported adjusted earnings of 3 cents. The company’s earnings benefited from cost-cutting measures.

Sales Discussion

Net sales of $1,473.7 million missed the Zacks Consensus Estimate of $1,489 million and declined 3% year over year. On a constant-currency basis, sales also declined 3% from the prior-year quarter. Decline in sales can primarily be attributed to dismal performance of American Girl and Fisher-Price brands.

In North America, gross sales declined 1%, both as reported and at constant currency. This was primarily due to decrease in Dolls (including Barbie and owned brands) and Infant, Toddler and Preschool (including Fisher-Price Friends, and Fisher-Price and Thomas & Friends).

Meanwhile, in the International region, gross sales were down 1% (as reported), driven by growth in Infant, Toddler and Preschool (including Fisher-Price Friends, and Fisher-Price and Thomas & Friends) and Vehicles (including CARS and Jurassic World vehicles marginally overshadowed by rise in sales of Hot Wheels). However, gross sales were flat in constant currency.

Brand-Wise Worldwide Sales

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

As reported, worldwide gross sales at Mattel Power Brands were down 3% to $1,665.3 million year over year. The metric declined 2% on a constant-currency basis.

However, the Barbie brand witnessed 2% growth as reported and 3% in constant currency, driven by positive POS momentum. Gross sales at the Hot Wheels brand improved 7% on a reported basis and 8% in constant currency. However, gross sales were down 3% as reported and 3% in constant currency at the Fisher-Price and Thomas & Friends brands. Gross sales at Other declined 9% as reported and 9% in constant currency.

Operating Results

Adjusted gross margin expanded 230 basis points to 48.9%, driven by savings from the Structural Simplification program and lower foreign exchange.

Adjusted other selling and administrative expenses decreased 2% to $383.8 million. The increase was primarily driven asset impairment expenses.

Balance Sheet

As of Dec 31, 2019, the company’s cash and equivalents were $630 million compared with $594.5 million as of Dec 31, 2018. Total inventories as of the end of the fourth quarter declined 8.7% year over year to $495.5 million.

The company’s long-term debt amounted to $2,846.8 million as of Dec 31, 2019, higher than $ 2,851.7 million as of Dec 31, 2018. Shareholder’s equity was $491.7 million.

2020 Guidance

The company’s guidance excludes any potential impact of coronavirus. The company expect 2020 gross sales to increase in the range of 1% to 2.5%, which include a minor foreign exchange impact. Sales are likely to be driven by mid-single digit growth in the company’s own brands, marginally offset by decrease in licensed brand. The company continues to expect growth in Doll category.

Margin is anticipated to increase in 2020 owing to benefits from structural simplification and capital light programs. Adjusted EBITDA is anticipated to be in the range of $575 million to $600 million.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -7% due to these changes.

VGM Scores

At this time, Mattel has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Mattel has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.